<PAGE> 1
As filed with the Securities and Exchange Commission on October 16, 1998
Registration No. 333-60447
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
----------------
MIDDLE BAY OIL COMPANY, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Alabama 1311 63-1081013
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
1221 Lamar Street, Suite 1020 JOHN J. BASSETT
Houston, Texas 77010 1221 Lamar Street, Suite 1020, Houston, TX 77010
(713) 759-6808 (713) 759-6808
(Address, including zip code, and telephone number, (Name, address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices) including area code, of agent for service)
Copies to: H. Grady Thrasher, III, Esq.
Thrasher, Whitley, Hampton & Morgan
Five Concourse Parkway, Suite 2150
Atlanta, Georgia 30328
(770) 804-8000
</TABLE>
Approximate date of commencement of public trading of securities: As soon as
practicable after the effective date of this Registration Statement and upon
consummation of the Exchange Offer to Unitholders of Enex Consolidated Partners,
L.P. described herein.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box: [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering:
<TABLE>
<CAPTION>
===================================================================================================================================
Proposed Maximum Proposed Maximum Amount of
Title of Securities Amount to be Offering Price Aggregate Registration
to be Registered Registered Per Unit Offering Price(2) Fee(2)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Series C Convertible
Redeemable Preferred Stock, 2,346,400 shares $5.00 $11,732,000 $3,460.94
Par Value $.02 per Share(1)
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock
Par Value $.02 per Share(3) 2,346,400 N/A N/A N/A
===================================================================================================================================
</TABLE>
(1) This Registration Statement relates to Series C Convertible Redeemable
Preferred Stock of the Registrant to be issued in exchange for
partnership interests in Enex Consolidated Partners, L.P., a New Jersey
limited partnership.
(2) Estimated in accordance with Rule 457(f)(2), solely for the purpose of
calculating the registration fee.
(3) Issuable upon conversion of shares of Series C Convertible Redeemed
Preferred Stock by the holders thereof for which no separate
consideration is required.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The statements contained herein that are not historical facts are
forward-looking statements and therefore involve a number of risks and
uncertainties. The actual results of future events described in such
forward-looking statements in this Prospectus, including those regarding Middle
Bay's and the Partnership's financial results, levels of oil and gas production
or revenue, capital expenditures and capital resource activities, could differ
materially from those estimated, anticipated or projected. Among the factors
that could cause actual results to differ materially are: general economic
conditions, competition, government regulations, the timing and extent of
changes in commodity prices for oil and gas, environmental risks, drilling,
producing and operating risks, risks related to exploration and development,
uncertainties about the estimates of reserves and the factors set forth in
"Risk Factors and Material Considerations" included elsewhere herein, as well
as the risks and uncertainties set forth from time to time in the other public
reports filed with the Securities and Exchange Commission by Middle Bay and the
Partnership and incorporated by reference herein.
<PAGE> 3
MIDDLE BAY OIL COMPANY, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM
NUMBER FORM S-4 CAPTION PROXY STATEMENT/PROSPECTUS CAPTION
------ ---------------- ----------------------------------
<S> <C> <C>
A. Information About the Transaction:
1. Forepart of the Registration Statement and Outside Front
Cover Page of Prospectus.................................. Outside Front; Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Prospectus... Inside Front and Outside Back Cover Pages
of Prospectus
3. Risk Factors, Ratio of Earnings to Fixed Charges and Other
Information Summary; Risk Factors and Material Con
siderations; Selected Financial Data
4. Terms of the Transaction................................. Cover Page of Prospectus; Summary; The
Exchange Offer and Proposal
5. Pro Forma Financial Information.......................... Selected Financial Data - Middle Bay; Man
agement's Discussion and Analysis
6. Material Contacts with the Company Being Acquired........ Summary; The Exchange Offer and Proposal
7. Additional Information Required for Reoffering by Persons
and Parties Deemed to be Underwriters.................... Not applicable
8. Interests of Named Experts and Counsel................... Legal Matters; Experts
9. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities............................... Not applicable
B. Information About the Registrant:
10. Information with Respect to S-3 Registrants.............. Not applicable
11. Incorporation of Certain Information by Reference........ Not applicable
12. Information with Respect to S-2 or S-3 Registrants....... Not applicable
13. Incorporation of Certain Information by Reference........ Not applicable
14. Information with Respect to Registrants Other Than S-3 or S-2
Registrants.............................................. Summary; Available Information; Manage
ment's Discussion and Analysis of Middle
Bay; Business of Middle Bay; Corporate
Governance of Middle Bay
</TABLE>
<PAGE> 4
<TABLE>
<S> <C> <C>
C. Information About the Company Being Acquired:
15. Information with Respect to S-3 Companies................ Not applicable
16. Information with Respect to S-2 or S-3 Companies......... Not applicable
17. Information with Respect to Companies Other Than S-2 or
S-3 Companies............................................ Summary; Management's Discussion and
Analysis of the Partnership; Business of the
Partnership
D. Voting and Management Information:
18. Information if Proxies, Consents or Authorizations are
to be Solicited.......................................... Cover Page of Prospectus; Summary-Des-
cription of the Series C Preferred; The
Exchange Offer and Proposal; Consent
Procedures
19. Information if Proxies, Consents or Authorizations are
not to be Solicited or in an Exchange Offer.............. Not applicable
</TABLE>
<PAGE> 5
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRA TION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITA TION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION
DATED OCTOBER ____, 1998
EXCHANGE OFFER
AN AGGREGATE OF 2,346,400 SHARES OF
MIDDLE BAY OIL COMPANY, INC. CONVERTIBLE REDEEMABLE
SERIES C PREFERRED STOCK FOR PARTNERSHIP UNITS
IN ENEX CONSOLIDATED PARTNERS, L.P.
(1,102,631 PARTNERSHIP UNITS)
EXCHANGE VALUE IN PREFERRED STOCK:
$10.64 PER PARTNERSHIP UNIT
This Prospectus (the "Prospectus") is being furnished to the investors
("Investors" or "Unitholders") in Enex Consolidated Partners, L.P., a New
Jersey limited partnership (the "Partnership"), in connection with the offer by
Middle Bay Oil Company, Inc., an Alabama corporation ("Middle Bay") and the
controlling shareholder of Enex Resources Corporation, a Delaware corporation
and the general partner of the Partnership ("Enex" or "General Partner"), to
exchange shares of Series C Convertible Redeemable Preferred Stock, $0.02 par
value, of Middle Bay ("Series C Preferred") for all of the right, title and
interest to units of limited partnership interest in the Partnership
("Partnership Units" or "Units") held by Investors, at the exchange value
outlined below (the "Exchange Offer"). Each share of Series C Preferred is
convertible at any time at the option of the holder into one share of Middle
Bay common stock. The General Partner of the Partnership is a 79.2%
majority-owned subsidiary of Middle Bay, and the Board of Directors and
executive officers of Middle Bay serve as the Board of Directors and executive
officers of the General Partner.
Series C Preferred of Middle Bay is being offered on a proportionate basis to
owners of Partnership Units whereby Unitholders will receive 2.128 shares of
Middle Bay Series C Preferred in exchange for each Unit held (the "Exchange
Value Per Unit"). In connection with the Exchange Offer, a proposal is being
submitted to Unitholders in the Partnership to amend the Partnership Agreement
to provide for the transfer of all assets and liabilities of the Partnership to
Middle Bay in exchange for shares of Series C Preferred and the pro-rata
distribution of the Series C Preferred on the basis of the Exchange Value for
each Unit in liquidation of the Partnership. EACH INVESTOR IN THE PARTNERSHIP
WHO TENDERS HIS UNITS WILL, BY THAT TENDER, CONSENT TO THE PROPOSAL.
<PAGE> 6
Middle Bay is making the Exchange Offer and Proposal for the primary purposes
of consolidating the assets of the Partnership with those of Middle Bay in
order to achieve efficiencies of operation and administration, to increase
Middle Bay's Proved Reserves and borrowing base for further acquisitions of oil
and gas properties, and to afford Unitholders the potential benefit of
liquidity in their investment and an opportunity to participate in Middle Bay's
potential growth as holders of Middle Bay equity securities. See "Reasons for
the Exchange Offer" on page 40.
ADOPTION OF THE PROPOSAL REQUIRES THE CONSENT OF INVESTORS OF THE PARTNERSHIP
HOLDING 60% OR GREATER OF THE PARTNERSHIP UNITS. THE GENERAL PARTNER OF THE
PARTNERSHIP (ENEX) OWNS 620,097 UNITS, COMPRISING 56.24% OF THE 1,102,631 TOTAL
PARTNERSHIP UNITS, AND MIDDLE BAY WILL CAUSE ENEX TO TENDER SUCH UNITS AND
CONSENT TO THE PROPOSAL. UNITHOLDERS WILL RECEIVE THE CONSIDERATION SET FORTH
HEREIN, AND THE PARTNERSHIP WILL BE DISSOLVED UPON CONSUMMATION OF THE EXCHANGE
OFFER. ALL OF THE INVESTORS IN THE PARTNERSHIP (EXCEPT THOSE WHO EXERCISE
CERTAIN APPRAISAL AND DISSENTERS' RIGHTS DESCRIBED BEGINNING ON PAGE ____ OF
THIS PROSPECTUS), WHETHER OR NOT THEY TENDER THEIR UNITS AND THUS VOTE IN FAVOR
OF THE EXCHANGE OFFER, WILL RECEIVE THE SAME NUMBER OF SHARES OF MIDDLE BAY
SERIES C PREFERRED AS THEY WOULD HAVE RECEIVED HAD THEY TENDERED THEIR
PARTNERSHIP UNITS, AND THE PARTNERSHIP WILL BE DISSOLVED.
THE EXCHANGE OFFER INVOLVES MATERIAL RISKS THAT SHOULD BE CONSIDERED
BY UNITHOLDERS. SEE "RISK FACTORS AND MATERIAL CONSIDERATIONS"
BEGINNING ON PAGE ___ OF THIS PROSPECTUS. IN PARTICULAR, UNITHOLDERS
SHOULD CONSIDER THE FOLLOWING FACTORS:
RISKS REGARDING THE PROPOSAL:
- UNITHOLDERS HAVE RECEIVED CASH DISTRIBUTIONS FROM THE PARTNERSHIP
BASED ON DISTRIBUTABLE CASH GENERATED FROM THE PARTNERSHIP'S
OPERATIONS. AFTER THE EXCHANGE, DISTRIBUTIONS TO FORMER UNIT HOLDERS
WILL BE IN THE FORM OF CASH DIVIDENDS ON THE SERIES C PREFERRED
(APPROXIMATELY 10% PER ANNUM ON THE EXCHANGE VALUE, PAYABLE
SEMI-ANNUALLY).
- THE EXCHANGE VALUE OF THE PARTNERSHIP UNITS IS BASED ON A FAIR MARKET
VALUE DETERMINATION BY AN INDEPENDENT ENGINEERING FIRM EMPLOYED BY THE
GENERAL PARTNER; HOWEVER, THERE IS NO ASSURANCE THAT THE EXCHANGE
VALUE REFLECTS THE VALUE OF THE NET ASSETS OF THE PARTNERSHIP IF SUCH
WERE SOLD TO AN UNAFFILIATED THIRD PARTY OR PARTIES IN AN ARM'S-LENGTH
TRANSACTION.
- MIDDLE BAY, AS CONTROLLING SHAREHOLDER OF THE GENERAL PARTNER,
HAS AN INHERENT CONFLICT OF INTEREST IN THE DETERMINATION OF THE
EXCHANGE VALUE. BOTH THE GENERAL PARTNER AND MIDDLE BAY OWE A
<PAGE> 7
FIDUCIARY DUTY TO UNITHOLDERS IN THE PARTNERSHIP. IN ADDITION,
MIDDLE BAY AND ENEX OWE A DUTY TO THEIR RESPECTIVE STOCKHOLDERS.
FURTHER, MIDDLE BAY EXPECTS TO BENEFIT FROM THE EXCHANGE.
- DETERMINATION OF THE EXCHANGE VALUE WAS BASED PRIMARILY ON THE
ESTIMATED PRESENT VALUE OF THE PARTNERSHIP'S PROVED OIL AND GAS
RESERVES, WHICH INVOLVES MANY UNCERTAINTIES AND COULD HAVE RESULTED IN
AN UNDERVALUATION OF PARTNERSHIP UNITS.
- THE ALTERNATIVES OF CONTINUING THE PARTNERSHIP OR LIQUIDATING ITS
ASSETS COULD POTENTIALLY BE MORE BENEFICIAL TO UNITHOLDERS THAN
THE EXCHANGE OFFER.
- INVESTORS THAT ARE NOT EXEMPT FROM FEDERAL INCOME TAX ON AN INVESTMENT
IN THE PARTNERSHIP ARE REQUIRED TO RECOGNIZE GAIN OR LOSS ON THE
EXCHANGE VALUE RECEIVED BY THEM.
- NO INDEPENDENT REPRESENTATIVE WAS ENGAGED TO REPRESENT THE
UNAFFILIATED INVESTORS IN NEGOTIATING THE TERMS OF THE EXCHANGE OFFER,
WHICH MAY BE INFERIOR TO THOSE THAT COULD HAVE BEEN NEGOTIATED BY AN
INDEPENDENT REPRESENTATIVE; HOWEVER, MIDDLE BAY OBTAINED AN OPINION AS
TO THE FAIRNESS OF THE TRANSACTION TO THE UNITHOLDERS FROM AN
INDEPENDENT INVESTMENT BANKING FIRM.
RISKS REGARDING OWNERSHIP OF MIDDLE BAY EQUITY SECURITIES:
- OWNERSHIP OF MIDDLE BAY SERIES C PREFERRED MAY INVOLVE GREATER RISK
THAN AN INVESTMENT IN THE PARTNERSHIP UNITS BECAUSE OF MIDDLE BAY'S
BROADER OPERATIONS AND ITS USE OF DEBT TO PARTIALLY FINANCE
ACQUISITIONS.
- FUTURE EQUITY OFFERINGS BY MIDDLE BAY COULD POTENTIALLY BE
DILUTIVE TO THE VALUE OF THE MIDDLE BAY COMMON STOCK INTO WHICH
THE SERIES C PREFERRED IS CONVERTIBLE.
- MIDDLE BAY, AS CONTROLLING SHAREHOLDER OF THE GENERAL PARTNER, HAS
CONFLICTS OF INTEREST IN DETERMINING THE TERMS OF AND RECOM MENDING
ACCEPTANCE OF THE PROPOSAL INASMUCH AS BOTH COMPANIES HAVE FIDUCIARY
DUTIES TO THE UNITHOLDERS, AS WELL AS TO THEIR RESPECTIVE
SHAREHOLDERS.
In reliance upon the report of H.J. Gruy and Associates, Inc. dated September
23, 1998 (the "Gruy Report") relative to the fair market value of the Proved
Reserves and probable and possible reserves of the Partnership, Middle Bay and
Enex have determined that the Total Exchange Value of all Units is $11,730,000
or $10.64 per Unit. The number of shares of Series C Preferred offered in
exchange for Partnership Units will be
<PAGE> 8
determined by dividing the Total Exchange Value by the $5.00 liquidation value
per share of Series C Preferred. Although Middle Bay has applied to have the
Series C Preferred listed for trading on the NASDAQ Small Cap Stock Market,
subject to approval, there is presently no trading market in the Series C
Preferred, and there can be no assurance that a trading market will develop
following the Exchange. On _________, 1998, the last reported bid price of the
underlying Middle Bay common stock as reported (Symbol: MBOC) on the NASDAQ
Small Cap Stock Market was $______ per share.
The Exchange Offer may be withdrawn at any time prior to its scheduled
expiration date if Middle Bay determines that a material change affecting the
Partnership or Middle Bay has occurred. The assets and liabilities of the
Partnership, upon approval of the Proposal and adoption of the Exchange Offer,
will be transferred to Middle Bay retroactively effective as of October 1, 1998
(the "Effective Date").
THE EXCHANGE OFFER EXPIRES AT 5:00 P.M. CENTRAL TIME
ON __________, 1998 UNLESS EXTENDED
This Prospectus also constitutes the prospectus of Middle Bay with respect to
the shares of Series C Preferred to be issued as consideration in the Exchange
Offer. Middle Bay has filed a Registration Statement on Form S-4 (together with
any amendments thereto, the "Registration Statement") with the Securities and
Exchange Commission (the "SEC"), of which this Prospectus forms a part.
THE SHARES OF SERIES C PREFERRED TO BE ISSUED IN CONNECTION WITH THE EXCHANGE
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESEN TATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The approximate date on which this Prospectus will first be mailed to the
Investors of the Partnership is ________, 1998.
THE DATE OF THIS PROSPECTUS IS __________, 1998.
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION.............................................................................................
SUMMARY .........................................................................................................1
The Exchange Offer and Proposal..........................................................................1
Description of Series C Preferred........................................................................1
Fairness of the Exchange Value...........................................................................2
Comparison of Exchange Value With Values Used in 1997 Partnership Roll-Up................................3
Summary Risk Factors and Considerations..................................................................3
Middle Bay Oil Company, Inc..............................................................................7
Enex Consolidated Partners, L.P.........................................................................10
General Background Information..........................................................................11
Alternatives to the Exchange............................................................................12
Reasons for the Exchange Offer; Recommendations of the General Partner and Middle Bay...................13
Fiduciary Duties of the General Partner and Middle Bay..................................................13
Accounting Treatment....................................................................................13
Business of Middle Bay and the Partnership After Consummation of the Exchange...........................13
Comparative Rights of Security Holders..................................................................13
Limited Appraisal/Dissenters' Rights....................................................................14
Right to Inspect and Copy Partnership Records...........................................................14
Resales of Middle Bay Series C Preferred; NASDAQ Small Cap Stock Market Listing.........................14
Material Advantages and Disadvantages of the Exchange and Proposal......................................14
Method of Determining Exchange Value for the Partnership................................................16
Fairness Opinion........................................................................................18
Consent Procedures......................................................................................18
Summary of Tax Consequences.............................................................................18
Conditions to the Exchange..............................................................................19
Regulatory Approvals....................................................................................19
Certain Transactions Between the Partnership, Enex and Middle Bay.......................................19
RISK FACTORS AND MATERIAL CONSIDERATIONS.....................................................................20
Risks Related to the Exchange Offer.....................................................................20
Dividends in Lieu of Cash Distributions........................................................20
Lack of Arm's-Length Negotiations to Determine Value of Partnership Units......................20
Potential Benefits of Alternatives to the Exchange.............................................20
Lack of Independent Representative; Fairness Opinion...........................................21
Valuation Conflict of Interest; Benefits of Exchange to Middle Bay.............................21
Uncertainties in the Method of Determining Exchange Value......................................21
Other Assets and Liabilities...................................................................21
Subsequent Events..............................................................................22
No Fractional Shares...........................................................................22
</TABLE>
<PAGE> 10
<TABLE>
<S> <C>
Inherent Uncertainties in Estimating Reserves and Future Net Cash Flows........................22
Changes in Form and Nature of Investment Vehicle and Related Tax Status........................22
Risks Relating to Certain Federal Income Tax Considerations....................................22
Risks Related to Middle Bay.............................................................................23
Potential Decline in Market Price of Middle Bay Securities.....................................23
Losses From Operations.........................................................................23
Inherent Uncertainties in Estimating Reserves and Future Revenues..............................23
Development of Additional Reserves.............................................................24
Retention and Attraction of Key Personnel......................................................24
Effective Control of Middle Bay by Single Shareholder..........................................24
Potential Dilutive Effect of Authorized but Unissued Capital Stock.............................25
Possible Delisting and Risk of Low-Priced Securities...........................................25
Risks Related to the Oil and Gas Industry...............................................................26
Risk of Oil and Gas Operations.................................................................26
Current Oil and Gas Industry Conditions........................................................26
Government Regulation; Environmental Risks.....................................................26
Competition....................................................................................27
PRICE RANGE OF MIDDLE BAY COMMON STOCK,
DIVIDENDS AND DISTRIBUTIONS.............................................................................27
THE EXCHANGE OFFER AND PROPOSAL..................................................................................28
Description of the Exchange Offer.......................................................................28
The Proposal............................................................................................29
Timing of Series C Preferred Issuance...................................................................29
Conditions to the Exchange..............................................................................30
Regulatory Approvals....................................................................................30
Limited Appraisal and Dissenters' Rights................................................................30
Distribution of Series C Preferred......................................................................31
Interests of Certain Persons in the Exchange and Proposal...............................................31
Resale of Middle Bay Series C Preferred.................................................................32
Fractional Shares.......................................................................................32
Resales of Series C Preferred; Stock Market Listing.....................................................32
Accounting Treatment....................................................................................32
Closing Date............................................................................................33
Operations After the Exchange...........................................................................33
Expenses; Fees..........................................................................................33
Middle Bay's Dividend Policy............................................................................33
METHOD OF DETERMINING EXCHANGE VALUE.............................................................................34
General ...............................................................................................34
Exchange Value Components...............................................................................35
Fairness Opinion........................................................................................37
</TABLE>
<PAGE> 11
<TABLE>
<S> <C>
REASONS FOR THE EXCHANGE OFFER...................................................................................40
Recommendation of the General Partner...................................................................40
Alternatives to the Exchange............................................................................42
Benefits of Continued Operations........................................................................43
Benefits of Liquidation.................................................................................44
Recommendations of the Boards of Directors of Middle Bay and
the General Partner; Reasons for the Exchange..................................................46
Fiduciary Duties of the General Partner and Middle Bay..................................................46
Conflicts of Interest...................................................................................47
Certain Transactions Between the Partnership, Enex and Middle Bay.......................................47
Access to Investor List and Partnership Records.........................................................47
CONSENT PROCEDURES...............................................................................................48
Written Consent and Vote Required.......................................................................48
Consent Tabulation......................................................................................48
Expiration of Exchange Offer............................................................................48
Amount Tendered.........................................................................................48
Revocability of Tenders.................................................................................49
Solicitation of Letters of Transmittal..................................................................49
Acceptance of Tenders...................................................................................49
Special Requirements for Certain Investors..............................................................49
Representations and Covenants...........................................................................50
Validity of Tenders.....................................................................................50
Payments of Fees and Expenses...........................................................................50
Compliance with Tender Offer Practices..................................................................51
MATERIAL FEDERAL TAX CONSEQUENCES................................................................................51
Tax Consequences of the Exchange........................................................................51
Realization of Suspended Passive Losses.................................................................52
Basis in Stock..........................................................................................52
SELECTED FINANCIAL DATA - MIDDLE BAY............................................................................54
Middle Bay Selected Historical Financial Data...........................................................54
MANAGEMENT'S DISCUSSION AND ANALYSIS OF MIDDLE BAY'S
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........................................................56
Results of Operations -- 1997...........................................................................56
Fiscal 1997.............................................................................................56
Fiscal 1996.............................................................................................59
Six Months Ended June 30, 1997 and 1998.................................................................60
Effects of Oil and Gas Price Fluctuations...............................................................62
Seasonality.............................................................................................63
Inflation and Changing Prices...........................................................................63
Capital Resources and Liquidity -- Fiscal 1997 and Fiscal 1996..........................................63
</TABLE>
<PAGE> 12
<TABLE>
<S> <C>
Capital Resources and Liquidity -- Six Months Ended June 30, 1997 and 1998..............................65
Abandonment Accruals...........................................................................66
Minor Property Sale............................................................................66
$100 Million Line of Credit....................................................................67
Series B Preferred Stock.......................................................................68
Stock Purchase Agreement.......................................................................68
The Enex Acquisition...........................................................................68
Future Capital Requirements....................................................................70
Current Activities.............................................................................70
Year 2000 Computer Issues......................................................................71
General ...............................................................................................71
Capital Expenditures -- Fiscal 1997 and Fiscal 1996.....................................................72
SELECTED FINANCIAL DATA - PARTNERSHIP............................................................................74
Partnership Selected Historical Financial Data..........................................................74
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PARTNERSHIP
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........................................................76
Results of Operations...................................................................................76
Capital Resources and Liquidity.........................................................................78
Six Months Ended June 30, 1997 and 1998.................................................................78
Capital Resources and Liquidity.........................................................................79
Certain Comparative Information.........................................................................80
SELECTED PRO FORMA CONSOLIDATED FINANCIAL
INFORMATION (UNAUDITED).................................................................................81
BUSINESS OF MIDDLE BAY...........................................................................................89
Business Strategy.......................................................................................89
Acquisition Policy......................................................................................90
Drilling Activities.....................................................................................90
Acquisitions and Mergers................................................................................92
Middle Bay Financing....................................................................................93
Competition, Markets and Regulation.....................................................................93
Employees...............................................................................................94
Properties..............................................................................................94
Legal Proceedings......................................................................................100
CORPORATE GOVERNANCE OF MIDDLE BAY..............................................................................100
Directors and Executive Officers.......................................................................101
Compensation of Directors..............................................................................103
Security Ownership of Certain Beneficial Owners........................................................103
Security Ownership of Management.......................................................................104
Changes in Control.....................................................................................106
Executive Compensation.................................................................................106
</TABLE>
<PAGE> 13
<TABLE>
<S> <C>
Employment Agreements................................................................................109
Compliance with Section 16(a) of the Exchange Act....................................................110
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................110
BUSINESS OF THE PARTNERSHIP...................................................................................111
General ............................................................................................111
Marketing............................................................................................112
Environmental and Conservation Regulation............................................................113
Tax Laws ............................................................................................113
Properties...........................................................................................114
Oil and Gas Reserves.................................................................................115
Net Oil and Gas Production...........................................................................115
Legal Proceedings....................................................................................116
Market for Common Equity and Related Security Holder Matters.........................................116
Number of Equity Security Holders....................................................................117
Distributions........................................................................................117
LEGAL MATTERS................................................................................................117
DESCRIPTION OF MIDDLE BAY EQUITY SECURITIES..............................................................117
Common Stock.........................................................................................117
Preferred Stock......................................................................................118
Certain Effects of Authorized but Unissued Stock.....................................................120
Transfer Agent and Registrar.........................................................................120
INDEMNIFICATION OF MIDDLE BAY'S DIRECTORS AND OFFICERS........................................................120
COMPARATIVE RIGHTS OF SECURITY HOLDERS........................................................................121
EXPERTS.......................................................................................................127
GLOSSARY......................................................................................................127
INDEX TO FINANCIAL STATEMENTS..............................................................................130
</TABLE>
<PAGE> 14
AVAILABLE INFORMATION
Middle Bay, Enex and the Partnership are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, file reports, proxy statements and other
information with the SEC. Such reports, proxy statements and other information
filed by Middle Bay, Enex and the Partnership with the SEC can be inspected at
the public reference facilities maintained by the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street NW, Washington, DC 20549 and should be available at the
SEC's regional offices at Seven World Trade Center, 13th Floor, New York, NY
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL
60621. Copies of such material may be obtained from the Public Reference
Section of the SEC at Room 1024, 450 Fifth Street NW, Washington, DC 20549 at
prescribed rates. The SEC maintains an Internet Website at http://www.sec.gov/
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. Such reports,
proxy statements and other information filed by Middle Bay may also be
inspected and copied at the offices of the NASDAQ Stock Market, 1735 K Street
NW, Washington, DC 20006.
Middle Bay has filed the Registration Statement on Form S-4 with the
SEC under the Securities Act of 1933 (the "Securities Act") with respect to the
Series C Preferred to be offered in connection with the Exchange. This
Prospectus does not contain all of the information contained in the
Registration Statement and the exhibits thereto, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. For further
information with respect to Middle Bay and the securities offered hereby,
reference is made to the Registration Statement, including the exhibits
thereto, which may be inspected at the SEC's offices, without charge, or copies
of which may be obtained from the SEC upon payment of prescribed fees.
Statements contained in this Prospectus or in any document incorporated in this
Prospectus by reference as to the contents of any contract or document referred
to herein or therein are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
The General Partner will furnish to any Investor, upon written request
and without charge, a current alphabetized listing of the names and addresses
of all Unitholders of the Partnership. Requests should be addressed to Enex
Resources Corporation, 1221 Lamar Street, Suite 1020, Houston, Texas 77010,
telephone number (713) 759-6808. Investors also have the right under the
Partnership Agreement to inspect the books and records of the Partnership.
<PAGE> 15
SUMMARY
The following is a brief summary of certain information contained
elsewhere in this Prospectus. This summary is not intended to be a complete
description of the matters covered in this Prospectus and is subject to and
qualified in its entirety by reference to the more detailed information and
financial statements contained elsewhere in this Prospectus, Exhibits hereto
and the documents incorporated herein by reference. Investors are urged to read
carefully the entire Prospectus and Exhibits. See "Glossary" included elsewhere
in this Prospectus for definitions of certain oil and gas terms.
THE EXCHANGE OFFER AND PROPOSAL
Middle Bay is offering to exchange Series C Preferred for Partnership
Units in the Partnership at the exchange rate outlined below (the "Exchange
Offer"). Investors who tender their Partnership Units will receive 2.128 shares
of Series C Preferred in exchange for each Partnership Unit. Cash will be
exchanged in lieu of any resulting fractional share of Series C Preferred. In
connection with the Exchange Offer, Middle Bay is submitting a Proposal to
Investors in the Partnership to amend the Partnership Agreement to provide for
the transfer of all of the assets and liabilities of the Partnership to Middle
Bay as of the October 1, 1998 Effective Date in exchange for Series C Preferred
and the pro-rata distribution of such consideration in liquidation of the
Partnership. Each Investor who tenders his Partnership Units pursuant to the
Exchange Offer will, by that tender, consent to the Proposal. If the
Partnership adopts the Proposal by the consent of a 60% majority of the
Partnership Units, all Investors in the Partnership (except those who choose to
exercise appraisal or dissenters' rights), whether or not they tendered their
Units in the Exchange Offer, will receive the same amount of Series C Preferred
they would have received had they tendered their Partnership Units. ALTHOUGH
CONSUMMATION OF THE EXCHANGE OFFER FOR THE PARTNERSHIP IS CONDITIONED UPON
APPROVAL BY THE PARTNERSHIP OF THE PROPOSAL, APPROVAL OF THE PROPOSAL AND
ADOPTION OF THE EXCHANGE OFFER IS EXPECTED BECAUSE MIDDLE BAY CONTROLS THE
GENERAL PARTNER AND THUS THE VOTING RIGHTS OF 56.24% OF THE UNITS. See "The
Exchange Offer and Proposal." Unitholders who may be entitled to a fractional
share of Series C Preferred will be paid cash in lieu of the fractional share.
DESCRIPTION OF SERIES C PREFERRED
The holders of Series C Preferred shares are entitled to receive
cumulative cash dividends in an amount per share of $.50 per annum, payable
semi-annually on March 31st and September 30th of each year (measured by the
fiscal year of Middle Bay). These dividends are payable in preference to and
prior to the payment of any dividend or distribution to any holder of Middle
Bay common stock or other junior security. In the event of a liquidation,
dissolution or winding up of Middle Bay, holders of Series C Preferred shares
will have the right to liquidation preferences in the amount of $5.00 per share
held, plus an amount equal to all dividends accumulated, accrued and unpaid
thereon to the date of final distributions to such holders, before any payment
will be made to holders of Middle Bay common stock or other junior securities
of Middle Bay. The liquidation preferences of the Series C Preferred shares
rank on a parity with the presently issued and outstanding Series B Preferred
shares.
- 1 -
<PAGE> 16
At any time from and after the Effective Date, the holders of Series C
Preferred shares will have the right to convert each share of Series C
Preferred into one share of Middle Bay common stock (as such conversion rate
may be adjusted as a result of any dividend, subdivision, combination or
issuance of Middle Bay common stock). On or after January 1, 2000, Middle Bay
may redeem all or a portion of the Series C Preferred, at its option, at a
purchase price of $5.00 per share, plus an amount equal to all accumulated,
accrued and unpaid dividends, if any, to the date of redemption, subject to the
holders' rights to convert.
The Series C Preferred is generally nonvoting; however, holders of
Series C Preferred are entitled to vote on any amendment, alteration or appeal
of any provision of Middle Bay's Articles of Incorporation which would
adversely affect any holder's rights and preferences. The issuance of an
additional series of preferred stock will not be deemed to adversely affect the
rights and preferences of the holders of Series C Preferred, so long as any
such series of preferred stock ranks junior to or on a parity with the Series C
Preferred.
Series C Preferred issued in the Exchange will be freely transferable
immediately following issuance; Middle Bay has applied for listing the Series C
Preferred shares for trading on the NASDAQ Small Cap Stock Market, subject to
approval and notice of issuance; however, no trading market presently exists
for the Series C Preferred, and there can be no assurance that a trading market
will develop following consummation of the Exchange. The Exchange Offer may be
withdrawn at the option of Middle Bay if (i) Middle Bay determines, in its sole
discretion, that a material change affecting the Partnership has occurred, or
(ii) Unitholders representing 175,000 or more Units elect to exercise
dissenters' rights. See "The Exchange Offer and Proposal," "Description of
Middle Bay Equity Securities" and "Comparative Rights of Security Holders."
FAIRNESS OF THE EXCHANGE VALUE
Harris Webb & Garrison, Inc. ("HWG") has rendered its opinion to
Middle Bay and the General Partner that the consideration to be received by
Unitholders based upon the Exchange Value as contemplated by the Exchange Offer
and Proposal is fair from a financial point of view. A copy of the Fairness
Opinion, dated October 15, 1998, is attached hereto as Exhibit "D" and should
be read in its entirety with regard to assumptions made, matters considered and
limitations of the review undertaken by HWG in rendering its opinion. See
"Method of Determining Exchange Value - Fairness Opinion."
COMPARISON OF EXCHANGE VALUE WITH VALUES USED
IN 1997 PARTNERSHIP ROLL-UP
H.J. Gruy & Associates, Inc. ("Gruy"), an independent petroleum
engineering firm, was engaged by Middle Bay and the General Partner to make a
fair market evaluation of the Partnership's oil and gas reserves as of October
1, 1998. Gruy is the same engineering firm which estimated the oil and gas
reserves for the Partnership and each of the Predecessor Partnerships in
connection with the 1997 consolidation of the Predecessor Partnerships into the
Partnership (the "1997 Roll-up"). Gruy's approach to determining the fair
market value of Proved Reserves for the Partnership for the Exchange Offer was
the same as for each of the partnerships which were consolidated in 1997 to
form the Partnership (the "Predecessor Partnerships") in connection with the
1997 Roll-up. However, Gruy assigned no fair market value to the categories of
probable and possible reserves for the Predecessor Partnerships, but did assign
a value for those categories of
- 2 -
<PAGE> 17
Partnership reserves for the Exchange Offer. To the extent that the fair market
evaluation for the Partnership's present estimated reserves differs materially
from the fair market valuation of the Predecessor Partnerships' reserves in
1997, the primary causes of such changes are the production and sale of oil and
gas production and properties by the Partnership and the decline in the market
prices for oil and gas over the past 12 months.
SUMMARY RISK FACTORS AND MATERIAL CONSIDERATIONS
In addition to the information included in this Prospectus, Investors
should carefully consider the following factors in determining whether to
accept the Exchange Offer and consent to the Proposal. The risk factors
summarized below are described in further detail elsewhere in this Prospectus
at "Risk Factors and Material Considerations" beginning on page 19.
(1) Risks Associated with the Exchange.
Middle Bay Dividend Policy. The Series C Preferred is
expected to pay cash dividends of 10% ($.50 per Preferred Share) per annum.
With respect to its common stock, Middle Bay's policy is to retain its earnings
to support the growth of Middle Bay's business. Accordingly, the Board of
Directors of Middle Bay has never declared cash dividends on its common stock
and does not plan to do so in the foreseeable future. Furthermore, the terms of
Middle Bay's debt agreements prohibit Middle Bay from paying cash dividends on
its common stock. Thus, upon consummation of the Exchange, Investors who choose
to convert the Series C Preferred into common stock would no longer receive
cash distributions, and it is unlikely that cash dividends will be paid on the
Middle Bay common stock at any time in the foreseeable future.
Lack of Arm's-Length Negotiations and Uncertainties in the
Method of Determining the Exchange Value. Although the Exchange Value was
determined by Middle Bay and Enex based upon a fair market evaluation of the
Partnership's Proved Reserves by Gruy dated September 23, 1998 (the "Gruy
Report"), the Exchange Value may not reflect the actual value of the net assets
of the Partnership. The primary assets of the Partnership considered by Gruy
when determining the Exchange Value were the proved oil and gas reserves of the
Partnership (the "Proved Reserves") and the present value of associated future
net cash flows as of October 1, 1998. There are many uncertainties inherent in
estimating quantities of Proved Reserves, and the present value attributed to
the Partnership's Proved Reserves may be less than the discounted future net
cash flows actually received from the Partnership's interest in its oil and gas
properties. In that event, the use of this valuation methodology will have
resulted in an undervaluation of the Partnership Units.
See "Method of Determining Exchange Value."
Federal Income Tax Consequences. Investors that are not
exempt from federal income tax on an investment in the Partnership will be
required to recognize gain or loss on the Exchange Value received by them. See
"Summary of Tax Consequences." To the extent that gain is recognized, such
taxpaying Investors will be required to pay federal income tax, although they
will be receiving Series C Preferred for which a trading market may not
develop. Investors also should consult their individual tax advisors to
determine whether they are subject to any tax under state law.
- 3 -
<PAGE> 18
Potential Benefits of Alternatives to the Exchange. The
alternatives to the Exchange Offer are the continuation of the Partnership or
the liquidation of the Partnership's assets and distribution of the liquidation
proceeds to Investors, either of which could potentially be more beneficial to
Investors than the Exchange by avoiding the risks associated with ownership of
Middle Bay Series C Preferred and, in the case of a liquidation of the
Partnership, by providing an immediate cash return to Investors. See "Reasons
for the Exchange Offer - Recommendation of the General Partner" and
"Alternatives to the Exchange."
Lack of Independent Representatives for Investors; Fairness
Opinion. No independent representative was selected or hired to represent the
interests of the Investors in negotiating the terms of the Exchange Offer. The
Exchange Value and other terms of the Exchange Offer may therefore be inferior
to those that could have been negotiated by an independent representative.
However, Middle Bay and the General Partner believe the Exchange Offer to be
fair to Unitholders. Middle Bay did retain an independent third party to render
an opinion regarding the fairness of the terms of the Exchange Offer to
Unitholders. The "Fairness Opinion" is summarized under "Fairness Opinion,"
beginning on page 36 of this Prospectus.
Conflicts of Interest of Middle Bay and the General Partner.
Middle Bay, as controlling shareholder of the General Partner of the
Partnership, has an inherent conflict of interest in the determination of the
Exchange Value. Both the General Partner and Middle Bay owe a fiduciary duty to
Unitholders in the Partnership. In addition, Middle Bay and Enex owe a duty to
their respective stockholders, and Middle Bay owes a duty to the minority
shareholders of Enex. Middle Bay will benefit from the acquisition of the
Partnership's properties by its receipt of cash flow from the properties and
the addition to its borrowing base of the Proved Reserves of the Partnership
which is expected to facilitate bank financing of future acquisitions. While
Middle Bay believes that it has fulfilled its fiduciary obligations in the
determination of the Exchange Value which is supported, in part, by the Gruy
Report and the Fairness Opinion, no degree of objectivity or professional
competence can eliminate the inherent conflicts of interest. See "Reasons for
the Exchange Offer Fiduciary Duties of Middle Bay and the General Partner" and
"Conflicts of Interest."
Other Assets and Liabilities. The method of determining the
Exchange Value takes into account the estimated value of other assets and
liabilities of the Partnership as of September 30, 1998. In calculating the
Exchange Value, the net book value of current assets and liabilities of the
Partnership was derived from the Partnership's unaudited balance sheet as of
September 30, 1998 prepared on an accrual basis. The balance sheet book value
of current assets and liabilities used by Middle Bay in the calculation of fair
market value which was included in the Exchange Value may be higher or lower
than the actual fair market value of those assets and liabilities.
Subsequent Events. The Exchange Value will not be adjusted to
reflect changes in the present value of the estimated future net cash flows
attributable to the Proved Reserves of the Partnership after September 23,
1998, although oil and gas prices in subsequent periods may differ from the
prices used on the date of the reserve reports.
No Fractional Shares. No fractional Series C Preferred will
be issued in connection with the Exchange Offer. A Unitholder who would
otherwise be entitled to a fractional share of Series C Preferred will be paid
cash in lieu of such fractional share.
- 4 -
<PAGE> 19
Inherent Uncertainties in Estimating Reserves and Future
Revenues. This Prospectus contains estimates of Middle Bay's and the
Partnership's proved oil and gas reserves and future net revenues therefrom. In
order to estimate the reserves, costs and future cash flows, reliance has been
made in part on geological, engineering and economic data furnished by Middle
Bay to Gruy. Although a best efforts attempt has been made to acquire all
pertinent data and to analyze it carefully with methods accepted by the
petroleum industry, there is no guarantee that the volumes of oil or gas or the
cash flows projected will be realized.
Changes in Form and Nature of Investment Vehicle and Related
Tax Status. The Partnership and its Predecessor Partnerships since inception
have been operated as partnerships under the Internal Revenue Code. Upon
consummation of the Exchange, the assets of the Partnership will be owned and
operated by Middle Bay, a "C" corporation which is subject to federal and state
income taxes. Unlike distributions from the Partnership, dividends of the
Series C Preferred shares are subject to tax at the Middle Bay corporate level
and at the individual shareholder level. Unitholders' rights with regard to
distributions and matters governing control and management of the business and
assets of the Partnership will no longer be determined by the Partnership
Agreement and New Jersey partnership law but will be controlled by the Articles
of Incorporation and Bylaws of Middle Bay and the Alabama Business Corporation
Act. See "Corporate Governance of Middle Bay" and "Comparative Rights of
Security Holders."
(2) Risks Associated with Ownership of Middle Bay Equity
Securities.
In addition to the information included in this Prospectus, Investors
should carefully consider the following factors related to Middle Bay in
determining whether to accept the Exchange Offer. The risk factors summarized
below are described in further detail elsewhere in this Prospectus at "Risk
Factors and Material Considerations."
Potential Decline in Market Price of Series C Preferred or
Underlying Common Stock. Access to any trading market which may develop in the
Series C Preferred by exchanging Investors may result in a relatively large
number of shares of Series C Preferred offered for sale immediately after the
Closing Date. This may tend to lower any market price for the Series C
Preferred. Future general stock market conditions, as well as conditions in the
oil and gas industry in general or the effect of such conditions on Middle Bay
in particular, could also adversely affect the market price of the Middle Bay
common stock into which the Series C Preferred is convertible. There can be no
assurance regarding any potential appreciation in the market price of the
common stock. Any decline in the market price of the common stock could lower
the market value of the Series C Preferred and reduce a Unitholder's return on
investment or increase the loss on the Unitholder's original investment.
Losses From Middle Bay's Operations. The historical financial
data for Middle Bay reflects a net loss for the year ended December 31, 1997 of
$16,184,052 after incurring a one-time, noncash impairment charge of
$21,147,823 required by Financial Accounting Standard #121 which requires that
long-lived assets be reviewed for impairment when events or changes in
circumstances indicate that the carrying value of such assets may not be
recoverable (see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Fiscal 1997"). Further, Middle Bay's net loss for
the six-month period ended June 30, 1998 was $2,148,628, or $.28 per share of
common stock. Middle Bay's future ability to
- 5 -
<PAGE> 20
maintain its financing arrangements, produce its oil and gas reserves, service
its debt obligations and pay dividends on the Series C Preferred could be
adversely affected by a continuing lack of profitability.
Development of Additional Reserves. Middle Bay's future
success depends significantly upon its ability to find or acquire additional
oil and gas reserves that are economically recoverable. There can be no
assurance that Middle Bay will be able to discover additional commercial
quantities of oil and gas or that Middle Bay will be able to continue to
acquire interests in underdeveloped oil and gas fields and enhance production
and reserves therefrom.
Retention and Attraction of Key Personnel. Middle Bay depends
to a large extent on the abilities and continued participation of certain key
employees, the loss of whose services could have a material adverse effect on
Middle Bay's business.
(3) Risks Related to Oil and Gas Industry.
Risks of Oil and Gas Operations. Middle Bay's operations are
subject to all of the risks normally incident to the operation and development
of oil and gas properties and the drilling of oil and gas wells, including
encountering unexpected formations or pressures, blowouts, cratering and fires
and, in horizontal wellbores, the increased risk of mechanical failure and
collapsed holes, the occurrence of any of which could result in personal
injuries, loss of life, environmental damages and other damage to the
properties of Middle Bay or others.
Current Oil and Gas Industry Conditions. Prices for oil and
natural gas are subject to wide fluctuation in response to relatively minor
changes in supply of and demand for oil and natural gas, market uncertainty and
a variety of geopolitical and other factors that are beyond the control of
Middle Bay.
Regulation. The oil and gas industry is subject to broad and
frequently changing regulations that could adversely affect the operations of
Middle Bay.
Competition. The oil and gas exploration and production
business is highly competitive. A large number of companies and individuals
engage in the drilling for and production of oil and gas, and there is a high
degree of competition for desirable oil and gas properties suitable for
drilling and for materials and third-party services essential for their
exploration and development. Many of Middle Bay's competitors have greater
financial and other resources than does Middle Bay.
In spite of the foregoing risks, Middle Bay initiated and proposed the
Exchange Offer and Middle Bay and Enex recommend adoption of the Proposal by
the Partnership to enable Middle Bay to acquire the assets and liabilities of
the Partnership and to provide Investors with the potential benefits summarized
below under the caption "Reasons for the Exchange Offer."
- 6 -
<PAGE> 21
MIDDLE BAY OIL COMPANY, INC.
Middle Bay Oil Company, Inc. ("Middle Bay" or the "Company") owns
79.2% of Enex Resources Corporation ("Enex"), the General Partner of the
Partnership. Middle Bay acquired its controlling ownership of the common stock
of Enex in March, 1998 pursuant to a cash tender offer.
Middle Bay is primarily engaged in the development and production of
oil and gas properties, and its operations are primarily in the Mid-Continent
and Gulf Coast regions of the contiguous United States. The Company's business
strategy is to seek new reserves principally in areas of low geologic risk and
to exploit underdeveloped existing oil and gas fields, with emphasis on the
following activities:
- Increasing production, cash flow and asset value by acquiring
Producing Properties with stable production rates, long
reserve lives and potential for exploitation and development;
- Building on Middle Bay's existing base of operations by
concentrating its development activities in its primary
operating areas in the Gulf Coast and the Mid-continent
Regions;
- Acquiring additional properties with potential for
developmental drilling to maintain a significant inventory of
undeveloped Prospects and to enhance Middle Bay's foundation
for future growth;
- Serving as operator of its wells to ensure technical
performance and reduce costs;
- Expanding its relationships with major and large independent
oil and gas companies to access their undeveloped properties,
seismic data and financial resources;
- Managing financial risk and mitigating technical risk by:
- drilling in known productive trends with multi-horizon
geologic potential;
- diversifying investment over a large number of wells in
Middle Bay's primary operating areas;
- developing properties that provide a balance between
short and long reserve lives; and
- keeping a balanced reserve profile between oil and gas;
and
- Maintaining low general and administrative expenses and
increasing economies of scale to reduce per unit operating
costs and reserve acquisition costs.
In the ordinary course of its business, the Company continues to
evaluate acquisition, joint venture and other opportunities that would enable
it to further its business strategy.
Principal Areas of Activity. The following table shows proved oil and
gas reserves by major field for Middle Bay's largest producing fields at
December 31, 1997. The values represent the present value of estimated future
net cash flows before income taxes, discounted at 10%, assuming unescalated
expenses and prices of $16.18/Bbl and $2.54/MMBtu attributable to proved
reserves at December 31, 1997, as determined by the independent reserve
engineers identified under "Experts":
- 7 -
<PAGE> 22
<TABLE>
<CAPTION>
Discounted
Present Percentage Oil Gas
Field Name/ Primary Value of Total Reserves Reserves
County/State Operator (Thousands) Present Value (MBbls) (MMcf)
------------ -------- ----------- ------------- --------- -------
<S> <C> <C> <C> <C> <C>
Spivey Company $ 9,329 30.9% 993 11,415
Harper/Kingman, KS
Riceville Field Murphy 4,958 16.4% 50 2,244
Vermillion, LA
Hatters Pond Texaco 1,019 3.4% 71 187
Mobile, AL
Wright Field Hilcorp 735 2.4% 96 150
Vermillion, LA
Murphy Lake Amerada Hess 587 1.9% 99 --
St. Martin, LA
Lockhart Crossing Amoco 488 1.6% 10 270
Livingston, LA
Polo Field Lu-Ray 481 1.6% 141 5
Noble, OK
Abbeville Company 473 1.6% 3 279
Vermillion, LA
Okeene N.W. Ricks Expl. 443 1.5% 11 507
Major, OK
N. Frisco City Torch Energy 443 1.5% 33 32
Monroe, AL
Others Various 11,223 37.2% 1,426 3,330
----------- ------------- --------- -------
Total $ 30,179 100.0% 2,933 18,419
=========== ============= ========= =======
</TABLE>
In 1997, Middle Bay acquired approximately 42,000 net mineral acres,
situated in Terrebonne, Lafourche and St. Mary Parishes in Louisiana pursuant
to a merger agreement with Shore Oil Company. Of the total acreage, 39,769
acres are non-producing and the remainder is held by production under existing
leases. The nonproducing acreage is located in the following parishes: 20,587
in Terrebonne (Montegut and Houma areas), 11,128 acres in Lafourche (Raceland
and Valentine areas) and 8,054 acres in St. Mary Parish (Charenton area). The
nonproducing acreage currently under lease and/or option has expiration dates
as follows: 17,835 acres in 1998 and 5,722 acres in 2000. As of December 31,
1997, 16,212 acres were not
- 8 -
<PAGE> 23
under lease. Royalty interest in the leases covering the nonproducing minerals
ranges from 20% to 25%. The mineral servitude prescription dates are estimated
by Middle Bay to be as follows: 620 acres prescribed in 1997, 6,226 acres in
1999, 5,286 acres in 2002, 4,145 acres in 2004, 1,121 acres in 2005, 1,145
acres held in perpetuity and the remaining acreage has prescription interrupted
by production. Effective April 1, 1992, Shore Oil Company sold the production
rights under tracts producing at that time and does not receive royalty income
from the sale of oil or gas on those tracts. Over 80% of the nonproducing
minerals have been covered by 3-D seismic shot by third parties and provided to
Middle Bay at no cost. During the period July 1, 1997 through December 31,
1997, Middle Bay received approximately $975,000 in lease bonus, delay rental
and seismic option income on the acreage. Lee Keeling and Associates, Inc., an
independent oil and gas engineering firm valued the acreage as of June 30, 1997
at $3,627,000. See "Experts." One unsuccessful exploratory well in Lafourche
Parish, the Shore Oil Company #1, was drilled on the fee mineral acreage in
1997 and abandoned in February, 1998. In Terrebonne Parish, two unsuccessful
exploratory wells, the Middle Bay Oil Co. #1 and Shore Oil Co. #1, were
abandoned in February and May, 1998, respectively. As of September 30, 1998, an
exploratory well, the Shore Oil Company #1, which was drilled in St. Mary
Parish, Louisiana, has been successfully completed and is awaiting installation
of production facilities. A second exploratory well, the Middle Bay Oil Co. #1,
was drilling in St. Mary Parish, Louisiana at September 30, 1998.
Productive Wells and Acreage. The following table depicts the number
of gross and net producing wells and related Developed and Undeveloped Acreage
in which Middle Bay owned an interest for the period ended December 31, 1997.
Undeveloped Acreage is oil and gas acreage (including, in certain instances,
rights in one or more horizons which may be penetrated by existing well bores,
but which have not been tested) to which Proved Reserves have not been assigned
by independent petroleum engineers.
Middle Bay's net Developed Acreage is located primarily in Oklahoma,
Texas, Louisiana, Alabama, New Mexico and Kansas. Middle Bay's net Undeveloped
Acreage is located primarily in Kansas.
<TABLE>
<CAPTION>
Acreage
--------------------------
Developed Undeveloped
--------- -----------
<S> <C> <C>
Gross Acres 239,646 9,758
Net Acres 20,337 8,643
Productive Wells
--------------------------
Oil Gas
--- ---
Gross Wells 797.00 184.00
Net Wells 68.67 30.13
</TABLE>
Excluded from the acreage data are approximately 44,041 net mineral
acres owned by Middle Bay, all of which are considered to have potential for
oil and gas exploration.
Middle Bay was incorporated in Alabama in 1992. Its principal
executive offices are located at 1221 Lamar Street, Suite 1020, Houston, Texas
77010, and its telephone number is (713) 759-6808.
- 9 -
<PAGE> 24
ENEX CONSOLIDATED PARTNERS, L.P.
Enex Consolidated Partners, L.P. (the "Partnership") was formed under
New Jersey Uniform Limited Partnership Law (1976) on June 30, 1997 from the
combination of thirty-four Enex Oil and Gas limited partnerships, consisting of
Enex Program I Partners, L.P., four partnerships in Enex Oil & Gas Income
Program II, eight partnerships in Enex Oil & Gas Income Program III, six
partnerships in Enex Oil & Gas Income Program IV, five partnerships in Enex Oil
& Gas Income Program V, Enex Oil & Gas Income Program VI - Series 1, L.P.,
three partnerships in Enex Income and Retirement Fund, three partnerships in
Enex 88-89 Income and Retirement Fund, and three partnerships in Enex 90-91
Income and Retirement Fund (collectively, the "Predecessor Partnerships"). The
General Partner of the Partnership is Enex Resources Corporation, a Delaware
corporation which is a 79.2% owned subsidiary of Middle Bay.
The Predecessor Partnerships were consolidated into the Partnership
based on fair market evaluations of the oil and gas reserves of each
Predecessor Partnership prepared by Gruy, and Enex has managed the Partnership
as General Partner since that date. Each of the Predecessor Partnership's
assets consisted primarily of interests in producing wells and, to a lesser
extent, interests in properties with proved undeveloped acreage. Certain of the
principal objectives of the consolidation included (i) anticipated reduction of
overhead and operating expenses, (ii) simplified managerial and administrative
requirements, (iii) reduction of risk due to diversification of assets, and
(iv) an expanded reserve base, all with a view toward maximizing income
distributions to Unitholders. Certain of the Predecessor Partnerships held
interests in properties with proved undeveloped reserves, and a further
objective of the Partnership was to complete the development of those
properties. The Partnership has now completed its drilling operations and
acquisitions, and the General Partner and Middle Bay believe that the
objectives of the consolidation of the Predecessor Partnerships have been
substantially achieved.
The Partnership is now engaged in the oil and gas business through the
ownership of various interests in producing oil and gas properties, as
described elsewhere herein. The Partnership has not engaged in significant
drilling activities except as an incidental part of the management of producing
properties or with a view toward enhancing the value of producing properties.
The Partnership does not engage in exploratory drilling. The expenses of
drilling, completing and equipping and operating development wells are
allocated approximately 96% to the limited partners and 4% to the General
Partner.
The primary investment objectives of the Partnership and its
Predecessor Partnerships were to acquire and hold nonworking interests in oil
and gas properties that (i) did not subject the Partnership to the obligations
inherent in the operations of oil and gas properties, (ii) entitled the
Partnership to revenues from sales of oil and gas, net of certain costs and
expenses, which would result in regular cash distributions to Unitholders, and
(iii) represented proved oil and gas reserves, the future production of which
would afford protection against future inflationary increases in oil and gas
prices. Middle Bay and the General Partner believe these objectives have been
met for the Partnership.
The principal executive office of the Partnership is maintained at 800
Rockmead Drive, Three Kingwood Place, Suite 200, Kingwood, Texas 77339. The
telephone number at this office is (281) 358-8401.
- 10 -
<PAGE> 25
The Partnership and the General Partner also share office facilities at the
principal offices of Middle Bay, 1221 Lamar Street, Suite 1020, Houston, Texas
77010.
GENERAL BACKGROUND INFORMATION
Enex has received inquiries and concerns from Investors regarding
anticipated production declines and reductions of cash distributions and
determined that the Partnership had reached the stage in its production history
where consideration of the Exchange Offer became appropriate. That
determination was based on the following factors:
Production Declines. Since 1993, the Partnership's
consolidated oil and gas production volumes have declined from peak levels
reached in 1992. Production volumes are expected to decline further in
subsequent periods due to ongoing depletion of the Partnership's wells. The
decline in production rates due to depletion of reserves is neither unusual nor
unexpected in the oil and gas industry.
Middle Bay's Acquisition of the Partnership's Properties.
Middle Bay believes it is a natural acquisition candidate for various reasons,
including Middle Bay's (i) interest in reducing the overhead expense involved
in administration of the Partnership by Enex; (ii) greater diversification and
capital resources enabling Middle Bay to fund contingent liabilities and other
expenses necessary for the continued operation of the Partnership's properties;
(iii) interest in assisting the General Partner in responding to Investors'
concerns about the future prospects of the Partnership; and (iv) anticipated
benefits of broadening its reserve and borrowing bases by acquiring the
Partnership's properties.
ALTERNATIVES TO THE EXCHANGE
Although Middle Bay and Enex have considered the continuation of the
Partnership or liquidation of the Partnership as potential alternatives to the
Exchange Offer, these alternatives were rejected for various reasons, including
the following:
Liquidation. Although liquidation would provide an immediate
cash return to the limited partners and would avoid the risks associated with
the ownership of Middle Bay shares, based on its experience in the oil and gas
industry, the General Partner determined that a liquidation of the Partnership
would likely result in lower cash value to the limited partners than the value
represented by the Series C Preferred. This is because third-party purchasers
of oil and gas properties may pay less than the net present value, discounted
at 10%, of the anticipated cash flows of a property's proved oil and gas
reserves, further adjusted for risks associated with different types of
reserves and other factors, and the administrative and overhead expenses
incurred during the period of liquidation would further reduce the cash
available to the limited partners. The market prices of Middle Bay Series C
Preferred (if any) and Middle Bay common stock from time to time may reflect
additional value associated with Middle Bay's success (of which there can be no
assurance) as a growth company in the oil and gas business.
Lack of Partnership Resources and Declining Reserves.
Continuation of the Partnership, while avoiding the risks associated with the
Exchange Offer and the discontinuance of cash distributions, would
- 11 -
<PAGE> 26
result in declining operating results and distribution rates for the
Partnership because: (i) reserves will be depleted in the ordinary course from
ongoing production, (ii) general and administrative expenses will remain the
same, regardless of the operating results of the Partnership, and (iii) the
Partnership would have to incur the cost of plugging and abandoning Partnership
wells when they become uneconomic or any future sale of the Partnership's wells
would be at a price which would reflect the anticipated costs of such plugging
and abandonment expenses.
Management's Conclusions Regarding Liquidation Value of the
Partnership at Comparable Values. Middle Bay and Enex have concluded that,
while an asset sale in liquidation might generate limited third-party interest,
a sale of the assets of the Partnership would not provide immediate cash
returns to Investors in excess of the liquidation value of the Partnership and
would likely result in valuations by a third-party bidder or bidders below the
Exchange Value of the Partnership Units. Middle Bay has engaged Gruy to provide
an independent analysis of the current liquidation value of the Partnership.
Results of that liquidation analysis reflect a liquidation value for the
Partnership estimated at $9.17 per Unit, or approximately 14% less than the
Exchange Value. In view of the uncertainties inherent in the General Partner's
analysis of the value, there can be no assurance that obtaining additional bids
for an arm's-length sale of the Partnership's assets would not result in a
valuation that would be comparable to or higher than the Exchange Value, while
also avoiding the risks associated with ownership of the Series C Preferred.
REASONS FOR THE EXCHANGE OFFER; RECOMMENDATIONS OF THE
GENERAL PARTNER AND MIDDLE BAY
Based on the Gruy Report and supported by the Fairness Opinion, Middle
Bay and the General Partner believe that the Exchange Offer is fair to and in
the best interests of the Partnership and its Unitholders and recommends that
Unitholders consent to the Proposal and accept the Exchange Offer. See
"Background of the Exchange Offer." The recommendation is made in light of the
fiduciary duties owed by the General Partner and Middle Bay to the Unitholders
and is based on a number of factors discussed in this Prospectus, including
benefits of the Exchange to Middle Bay which involve inherent conflicts of
interest. See "Reasons for the Exchange Offer." If the Exchange is not
consummated, the Partnership will continue to operate its properties, and the
General Partner will review alternatives that may become available from time to
time regarding the sale of the Partnership's assets.
FIDUCIARY DUTIES OF THE GENERAL PARTNER AND MIDDLE BAY
Both the General Partner and Middle Bay owe a fiduciary duty to
Unitholders in the Partnership. In addition, Middle Bay and Enex owe a duty to
their respective stockholders, and Middle Bay owes a duty to the minority
shareholders of Enex. Middle Bay's and Enex's fiduciary duties to Unitholders
include legal responsibilities of loyalty, care and good faith. Neither Enex,
as the General Partner of the Partnership, nor Middle Bay, as the parent of
Enex, may profit by any conduct or transaction in contravention of their
fiduciary obligations to the Investors.
- 12 -
<PAGE> 27
ACCOUNTING TREATMENT
The Exchange will be accounted for as a purchase by Middle Bay.
Accordingly, the purchase price will be allocated to assets and liabilities
based on their estimated values as of the date of acquisition.
BUSINESS OF MIDDLE BAY AND THE PARTNERSHIP AFTER
CONSUMMATION OF THE EXCHANGE
Middle Bay is an independent oil and gas company engaged in the
acquisition of producing properties and the exploration, development and
production of oil and gas in the contiguous United States, primarily in the
Mid-Continent and Gulf Coast regions. Upon consummation of the Exchange, Middle
Bay will operate the acquired Partnership assets as it operates its oil and gas
properties or may sell such assets to third parties at any time. See
"Background of the Exchange Offer."
COMPARATIVE RIGHTS OF SECURITY HOLDERS
For a comparison of the rights of Middle Bay stockholders under
Alabama law and Middle Bay's Certificate of Incorporation and Bylaws with the
rights of the partners of the Partnership under New Jersey law and the
Partnership Agreement, see "Comparative Rights of Security Holders."
LIMITED APPRAISAL/DISSENTERS' RIGHTS
Unitholders who do not vote in favor of or who oppose the Proposal
will have certain appraisal or dissenters' rights. Unitholders who elect to
exercise their appraisal rights will have the option to receive cash in lieu of
the Series C Preferred based on the liquidation value of the Partnership's
assets determined in accordance with the Gruy Report, as adjusted in accordance
with the Partnership Agreement. Such rights are not required by New Jersey
partnership law, and the appraisal and limited dissenters' rights afforded
Unitholders are those provided by the Partnership Agreement.
Investors residing in California will be afforded the option to elect
limited dissenters' rights in accordance with the requirements for roll-up
transactions under the California Code. By voting against the Proposal,
Investors in the State of California who choose to exercise their California
dissenters' rights will receive the cash equivalent of the Exchange Value of
their interests. If that cash amount is greater than the liquidation value of
the Units, dissenting California Investors will receive more cash than they
would otherwise receive by electing appraisal rights under the Partnership
Agreement. California Investors hold less than 1% of the interests in the
Partnership, and the impact of the exercise of appraisal rights or dissenters'
rights under California law is not likely to materially affect the number of
shares of Series C Preferred issued or cash paid pursuant to appraisal or
dissenters' rights by Middle Bay in connection with the Exchange Offer.
RIGHT TO INSPECT AND COPY PARTNERSHIP RECORDS
A Unitholder has the right to inspect and copy a list of the names and
addresses of all other Unitholders of the Partnership at the principal office
of the Partnership (which is the office of the General Partner and
- 13 -
<PAGE> 28
Middle Bay in Houston, Texas) during normal business hours. On request, a copy
of such list, under certain circumstances, will be furnished to any Unitholder
upon payment of reasonable reproduction and mailing costs.
RESALES OF MIDDLE BAY SERIES C PREFERRED; NASDAQ SMALL CAP STOCK MARKET LISTING
The shares of Middle Bay Series C Preferred (including the underlying
shares of common stock into which the Series C Preferred is convertible) that
will be issued to Unitholders in connection with the Exchange and upon
liquidation of the Partnership have been registered under the Securities Act.
Application has been made by Middle Bay for listing of the Series C Preferred
on the NASDAQ Small Cap Stock Market subject to notice of issuance. All shares
of Series C Preferred received by Unitholders will be freely tradable by those
Investors to the extent that any trading market develops in the Series C
Preferred. Investors who choose to convert the Series C Preferred into shares
of Middle Bay common stock will receive freely tradeable shares of common
stock. Middle Bay's common stock is traded on the NASDAQ Small Cap Stock Market
(symbol:
MBOC).
MATERIAL ADVANTAGES AND DISADVANTAGES OF THE EXCHANGE AND PROPOSAL
In considering the Exchange, Middle Bay and the General Partner, took
into account various advantages and disadvantages of the Exchange to the
Partnership and its Investors. The advantages considered included:
(a) The total consideration to be received by Unitholders
represents the fair market value of all assets of the
Partnership as supported by the Gruy Report and the Fairness
Opinion;
(b) Middle Bay's historical growth in Proved Reserves and oil and
gas production and its future business prospects;
(c) Middle Bay's assumption of all liabilities of the
Partnership, including any contingent or other liabilities
not presently known to the Partnership;
(d) The consideration to be received by the Partnership in
connection with the Exchange represents consideration to
Unitholders in excess of that which could be expected from
continued cash distributions;
(e) Investors will receive the benefit of any future growth in
the value of their equity interest in Middle Bay rather than
receiving cash distributions from the Partnership, which are
likely to decrease rapidly as the remaining oil and natural
gas reserves of the Partnership are depleted; and
(f) Liquidity of the common stock of Middle Bay underlying the
Series C Preferred and the potential liquidity of the Series
C Preferred compared to the lack of liquidity of the
Partnership Units.
- 14 -
<PAGE> 29
The General Partner also considered certain disadvantages that
included:
(a) The possibility that the price of oil and/or gas could
increase, thereby increasing the value of the Proved Reserves
of the Partnership, which could have a more direct benefit to
Unitholders if owned by the Partnership rather than Middle
Bay;
(b) Although the Series C Preferred is expected to pay cash
dividends semi-annually at the rate of 10% per annum ($.50
per Series C Preferred share per year), Middle Bay is
restricted under certain credit agreements from paying cash
dividends on its common stock, and Unitholders could continue
to receive cash distributions from the Partnership which
would be in excess of the dividend income payable on the
Series C Preferred shares per year;
(c) Tax consequences to Unitholders in connection with the
Exchange and liquidation of the Partnership;
(d) The possibility that the reserve estimates for the Partnership
could be undervalued; and
(e) Risks associated with the future market value of Middle Bay
Series C Preferred or the underlying common stock.
See "Reasons for the Exchange Offer." For other relevant factors, see also
"Risk Factors and Material Considerations."
METHOD OF DETERMINING EXCHANGE VALUE FOR THE PARTNERSHIP
Components of the Exchange Value. The Total Exchange Value represents
the estimated fair market value of the Partnership's Proved Reserves as
determined by the Gruy Report and other net assets, including probable and
possible reserves and general intangibles, as determined by Middle Bay and
Enex. These components represent all of the assets and liabilities of the
Partnership and were determined by Gruy, Middle Bay and Enex as of October 1,
1998, the Economic Effective Date.
Neither Middle Bay nor Enex instructed Gruy as to pricing, cost or
other economic parameters or methods or the assessment of reserve
characteristics, nor did either company limit the scope of Gruy's investigation
for purposes of preparing the fair market value appraisal. Enex provided Gruy
with basic evaluation data for its use in determining the Partnership's Proved
Reserves and their value. Gruy prepared its own reserve estimates of the
Partnership's properties. Neither Middle Bay nor Enex directed Gruy as to the
amount of consideration to be paid to the Partnership for its property
interests nor provided any information to Gruy on amounts to be paid to
Unitholders. The amount of consideration to be paid was determined by Middle
Bay's Board of Directors based upon Gruy's estimates of the fair market value
of those interests. Gruy did not opine on the fairness of the transaction to
Unitholders; however, Middle Bay acquired a separate report or opinion
regarding the fairness to Unitholders of the price at which the Partnership's
assets will be sold to Middle Bay if the Proposal is approved by Unitholders.
- 15 -
<PAGE> 30
The following unaudited table sets forth (i) the components of the
Exchange Value of the Units and (ii) the Exchange Value Per Unit held by an
Investor. This information was compiled by Gruy and Enex from the Partnership's
financial and property records for the year ended December 31, 1997 and such
records for the six months ended June 30, 1998:
EXCHANGE VALUE TABLE
<TABLE>
<CAPTION>
Participants Total Exchange Value Per
Components of Exchange Values Exchange Value(1) Partnership Unit(2)
- ----------------------------- ------------------ -------------------
<S> <C> <C>
Estimated fair market value of Proved
Reserves as of October 1, 1998(3) $10,380,000 $ 9.42
Current assets, less current liabilities(4) 1,250,000 1.13
General intangibles 100,000 .09
----------- ------
Total Exchange Value $11,730,000 $10.64
Estimated Number of Shares of Series C Preferred
to be Issued Per Partnership Unit(5) 2.128
</TABLE>
(1) No Exchange Value is attributable to the General Partner's interest.
(2) Obtained by dividing the Total Exchange Value by 1,102,631 Partnership
Units.
(3) Value of estimated future net cash flows from Proved Reserves of the
Partnership as of October 1, 1998, as reflected in the fair market
value report dated September 23, 1998 for the Partnership as of that
date issued by H.J. Gruy and Associates, Inc., independent petroleum
engineers.
(4) Estimated net book value of current assets and liabilities at September
30, 1998.
(5) Obtained by dividing the Total Exchange Value by the Series C Preferred
liquidation value of $5.00 per share.
Proved Reserves. Proved Reserves of the Partnership and the estimated
future net cash flows attributable thereto were derived from the fair market
value report dated September 23, 1998 for the Partnership prepared by Gruy (the
"Gruy Report"). The reserve estimates were prepared in accordance with SEC
regulations concerning Proved Reserves, with estimated future net cash flows
from Proved Reserves based on prices as of September 23, 1998, except that
certain escalations of prices and costs were made over the estimated life of
the reserves and discounted at 10% per annum. In addition, Gruy estimated the
fair market value of probable and possible reserves. A suitable risk adjustment
factor was applied during the evaluation process utilized by Gruy to obtain the
estimated future net cash flows from the Proved Reserves of the Partnership to
account for uncertainties inherent in projecting future production rates, and,
except for price and cost escalation assumptions used by Gruy, no adjustment
was made to take into account fluctuations in oil and gas prices after October
1, 1998.
General Intangibles. In determining the value attributed to general
intangibles, Middle Bay and Enex evaluated the success to date of the
Partnership, total consideration paid to date to Investors and the value to
Middle Bay of dissolving and liquidating the Partnership so that Middle Bay can
focus on its current operations and reduce the administrative burdens
associated with operating the Partnership.
- 16 -
<PAGE> 31
From inception through October, 1998, the Partnership has made cash
distributions to Unitholders aggregating $6,455,865, or approximately $5.85 per
Unit. Assuming that an Investor in the Partnership elects to hold his or her
shares of Series C Preferred and the aggregate market price of the shares of
Series C Preferred received per Unit (if a trading market develops) remains at
or above the Exchange Value per Unit of $10.64, Middle Bay believes that
Unitholders will have received consideration in the form of cash distributions
and Series C Preferred (valued at $5.00 per share) of approximately 164% of the
initial investment in the Partnership since its consolidation as of July, 1997,
without regard to any tax benefits received by the participants. Middle Bay
believes that Unitholders will not receive any value for the general
intangibles in any alternative to the Exchange.
Comparison of Valuation for Purposes of the Exchange Offer With
Valuation Performed for the 1997 Roll-up. Gruy was engaged by Middle Bay and
the General Partner to make a fair market evaluation of the Partnership's oil
and gas reserves as of October 1, 1998. Gruy is the same engineering firm which
estimated the oil and gas reserves for the Partnership and each of the
Predecessor Partnerships in connection with the 1997 consolidation of the
Predecessor Partnerships into the Partnership (the "1997 Roll-up"). Gruy's
approach to determining the fair market value of Proved Reserves for the
Partnership for the Exchange Offer was the same as for each of the partnerships
which were consolidated in 1997 to form the Partnership in connection with the
1997 Roll-up. However, Gruy assigned no fair market value to the categories of
probable and possible reserves for the Predecessor Partnerships, but did assign
a value for those categories of Partnership reserves for the Exchange Offer. To
the extent that the fair market evaluation for the Partnership's present
estimated reserves differs materially from the fair market valuation of the
Predecessor Partnerships' reserves in 1997, the primary causes of such changes
are the production and sale of oil and gas production and properties by the
Partnership and the decline in the market prices for oil and gas over the past
12 months.
Uncertainties Inherent in Valuation Methodology. There are numerous
uncertainties inherent in estimating quantities and production rates of
hydrocarbons. Estimates of the Partnership's Proved Reserves by independent
petroleum engineers other than Gruy could result in higher or lower valuations
than those determined by Gruy. The Exchange Value may not reflect the value of
the Units or the value of the properties attributable to the Units if sold to
an unaffiliated third party or parties in an arm's-length transaction.
FAIRNESS OPINION
Harris Webb & Garrison, Inc. ("HWG") has rendered its opinion to
Middle Bay and the General Partner that the consideration to be received by
Unitholders based upon the Exchange Value as contemplated by the Exchange Offer
and Proposal is fair from a financial point of view. A copy of the Fairness
Opinion, dated October 15, 1998, is attached hereto as Exhibit "D" and should
be read in its entirety with regard to assumptions made, matters considered and
limitations of the review undertaken by HWG in rendering its opinion. See
"Method of Determining Exchange Value - Fairness Opinion."
CONSENT PROCEDURES
To tender Partnership Units in exchange for Series C Preferred at the
Exchange Rate and thereby consent to the Proposal, each Unitholder should
complete and sign the Letter of Transmittal accompanying this
- 17 -
<PAGE> 32
Prospectus (a form of which is included as Exhibit "C") and return it to Middle
Bay during the 30-day period ending at 5:00 p.m. Central Time on _________,
1998 (the "Expiration Date"). The Expiration Date may be extended for up to an
additional ten-day period, although no extension is presently contemplated.
Middle Bay will not accept tenders of less than all of the Partnership Units
held by a Unitholder. Tenders of Units and consents to the Proposal may be
withdrawn upon written notice to Middle Bay, 1221 Lamar Street, Suite 1020,
Houston, Texas 77010, received at any time prior to the Expiration Date.
SUMMARY OF TAX CONSEQUENCES OF THE EXCHANGE
Upon consummation of the Exchange, Unitholders will realize gain in an
amount equal to the excess of the fair market value of the Series C Preferred
received by them over their respective bases in the Partnership Units they
hold. If a Unitholder's Unit has a tax basis greater than the fair market value
of the Series C Preferred received, such Unitholder would realize a loss for
tax purposes.
Assuming the Investor has held his Interest for more than one year and
assuming his Units have not been held for sale in the ordinary course of the
Investor's trade or business, any gain or loss realized upon the transfer of
the Partnership Units will be taxed as long-term capital gain or loss, except
to the extent that the consideration received is attributable to his allocable
share of inventory items and unrealized receivables (including depreciation
recapture and excess intangible drilling and development costs) of the
Partnership. The portion of any gain attributable to these items will be taxed
to the Investor as ordinary income.
Investors should read the more detailed discussion of the federal
income tax consequences contained in "Certain Federal Tax Consequences" and are
also urged to consult with their own tax advisors with respect to the tax
consequences to them of the transaction, including the application of state,
local and foreign tax laws.
CONDITIONS TO THE EXCHANGE
The Exchange Offer is expected to be consummated on the Closing Date,
which shall be no more than five days following the Expiration Date, as
extended. The Exchange Offer to the Partnership is conditioned upon consent of
60% of the Units to the Proposal and the absence of any material adverse
development affecting the Partnership or Middle Bay, as determined by Middle
Bay in its sole discretion. On the Closing Date, subject to satisfaction of
these conditions, Middle Bay intends to accept all Units validly tendered and
not withdrawn pursuant to the Exchange Offer.
REGULATORY APPROVALS
Upon effectiveness of the registration statement of which this
prospectus constitutes a part, federal or state regulatory approval is required
in connection with the Exchange Offer or the adoption of the Proposal by the
Partnership.
- 18 -
<PAGE> 33
CERTAIN TRANSACTIONS BETWEEN THE PARTNERSHIP, ENEX AND MIDDLE BAY
Enex, as General Partner and as a Unitholder of the Partnership, has
received $3,574,810 in total distributions from the Partnership since its
formation in 1997. These distributions included $3,403,404 attributable to
Enex's interest as a Unitholder and $171,406 attributable to its general
partnership interest. Middle Bay, as owner of 79.2% of Enex, benefits
indirectly from the Partnership's distributions to Enex. Since July 1997, Enex
has purchased for cash Units from various Unitholders at prices ranging from
$____ to $____ per Unit.
RISK FACTORS AND MATERIAL CONSIDERATIONS
In addition to the material contained elsewhere herein, the following
factors should be carefully considered.
RISKS RELATED TO THE EXCHANGE OFFER
Dividends in Lieu of Cash Distributions. The Exchange will
result in the Unitholders holding shares of Series C Preferred of Middle Bay.
The Series C Preferred is expected to pay cash dividends of $.50 per Preferred
Share which, based on the Exchange Value of 2.128 Preferred Shares per Unit,
result in annual dividends of $1.06 per Unit, payable semi-annually. Middle Bay
has paid no cash dividends on its common stock and does not anticipate paying
cash dividends on its common stock in the foreseeable future. The cash
distributions paid by the Partnership were $3.07 per Unit for 1997 and $.85 per
Unit for the quarter ended March 31, 1998, $.75 per Unit for the quarter ended
June 30, 1998, and $1.18 per Unit for the quarter ended September 30, 1998.
Despite the reduction in cash distributions to the Partners in connection with
the Exchange, Middle Bay believes that if the Partnership were to continue
operations, the cash distributions that Investors would receive from the
Partnership would rapidly decline as the reserves of the Partnership are
depleted.
Lack of Arm's-Length Negotiations to Determine Value of
Partnership Units. The Exchange Value of the Partnership Units were determined
by Middle Bay based on the Gruy Report which contains a fair market value
determination based, in part, on the estimated present value of the
Partnership's Proved Reserves and a valuation of the general intangibles of the
Partnership by Middle Bay (as described herein) and, as a result of Middle
Bay's inherent conflict of interests and various uncertainties involved in
estimating reserve quantities and values, may not reflect the value of the oil
and gas properties and other assets of the Partnership if such assets were sold
to an unaffiliated third party in an arm's-length transaction. See
"Uncertainties in the Method of Determining the Exchange Value" and "Valuation
Conflict of Interest" below. While Middle Bay believes that the methodology
employed in determining the Exchange Value is fair to Unitholders, resulting in
valuations that exceed the estimated liquidation value of the Partnership, the
liquidation value was determined by Middle Bay in reliance upon the Gruy
Report.
- 19 -
<PAGE> 34
Risks Relating to Certain Federal Income Tax Considerations.
Upon consummation of the Exchange, Investors will recognize gain in the amount
of and to the extent that the fair market value of the Series C Preferred
received by them exceeds their respective bases in the Partnership Units they
hold. Further, the Internal Revenue Service may seek to recharacterize the
transaction as a transfer of assets by the Partnership in exchange for Series C
Preferred and subsequent liquidation of the Partnership and distribution of its
remaining assets. Such recharacterization of the transaction may adversely
affect the characterization of income recognized by Investors upon consummation
of the Exchange. In addition, under such circumstances, the tax consequences
realized by an Investor consenting to the Exchange Offer may differ from that
realized by Investors who do not participate in the Exchange but rather receive
Series C Preferred upon liquidation of the Partnership.
Potential Benefits of Alternatives to the Exchange. Instead
of proposing the Exchange, Middle Bay, as controlling shareholder of the
General Partner, could instead continue to operate the Partnership or, with the
approval of Unitholders of the Partnership, seek to liquidate the Partnership's
assets and distribute the liquidation proceeds in accordance with the
provisions of the Partnership Agreement, enabling Investors to reinvest
proceeds from the asset sales in the case of a liquidation and avoid the market
risks associated with the ownership of Middle Bay Series C Preferred to be
received in the Exchange. Both alternatives were rejected by Middle Bay based
on its analysis of their comparative results and values. Middle Bay believes
that continuation of the Partnership would result in substantial additional
reductions in the cash distribution rates for the Partnership due primarily to
expected production declines from depletion of reserves. Middle Bay's analysis
of continuing the Partnership in light of these factors, based on average oil
and gas prices received in 1998 and reserve data as of October 1, 1998,
reflects declines in projected annual distribution rates per Unit from $3.07 in
1997 to $3.22 in 1998, $1.33 in 1999 and $1.07 in 2000. However, the
Partnership's future performance will depend on actual oil and gas prices,
production levels and operating costs, which could materially affect Middle
Bay's continuation analysis in either direction. This liquidation valuation
estimated by Middle Bay could, however, prove to be incorrect since the
estimate is based on various pricing and other market-related assumptions.
Lack of Independent Representative; Fairness Opinion. Middle
Bay did not engage an independent representative to negotiate the terms of the
Exchange Offer on behalf of the Unitholders. As a result, the Exchange Value
and other terms of the Exchange Offer may not be as favorable as the terms that
an independent representative might have obtained. However, Middle Bay did
retain an independent third party to render an opinion with regard to the
fairness of the Exchange Offer to the Investors in the Partnership. See "The
Exchange Offer - Fairness Opinion."
Valuation Conflict of Interest; Benefits of Exchange Offer to
Middle Bay. The determination of the Exchange Value by Middle Bay involves a
conflict of interest because of Middle Bay's control of Enex's duties as
General Partner of the Partnership and in connection with Middle Bay's purchase
of the Partnership's assets. Accordingly, Middle Bay's determination may not
reflect the value of the Partnership's net assets if all such assets were sold
to an unaffiliated third party or parties in an arm's-length transaction.
During 1998, certain properties of the Partnership have been sold to
unaffiliated third parties at prices both less than and greater than the
valuations used in computing the Exchange Value; however, no attempt has been
made to sell all of the Partnership's properties to any third party. The
proceeds from the sale of Partnership properties in 1998 have been distributed
to the Partnership's Unitholders and General Partner in accordance with their
respective interests. As controlling shareholder of the General Partner of the
Partnership, Middle Bay owes
- 20 -
<PAGE> 35
fiduciary duties to the Investors and also owes a duty to the stockholders of
Middle Bay and the minority stockholders of Enex. Middle Bay expects to benefit
from the Exchange by increasing its Proved Reserves, cash flow and borrowing
base for purposes of financing future acquisitions. While Middle Bay believes
that it has fulfilled its fiduciary obligations in its determination of the
Exchange Value, because of the potential benefits to Middle Bay from the
acquisition of the Partnership's properties pursuant to the Exchange Offer, no
degree of objectivity or professional competence can eliminate the inherent
conflict of interest.
Uncertainties in the Method of Determining Exchange Value.
While Middle Bay believes that the method of determining the Exchange Value
represents a fair, reasonable and proper method of valuing the Partnership
Units based on the Gruy Report, the method of determining the Exchange Value is
subject to various uncertainties and may have resulted in a valuation that
would differ from offers made by independent bidders. The components of the
Exchange Value and the factors underlying these uncertainties are described
herein.
Other Assets and Liabilities. The method of determining the
Exchange Value takes into account the estimated value of other assets and
liabilities of the Partnership as of September 30, 1998. In calculating the
Exchange Value, the net book value of current assets and liabilities of the
Partnership was derived from the Partnership's unaudited balance sheet as of
September 30, 1998 prepared on an accrual basis. The balance sheet book value
of current assets and liabilities used by Middle Bay in the calculation of fair
market value which was included in the Exchange Value may be higher or lower
than the actual fair market value of those assets and liabilities.
Subsequent Events. The Exchange Value will not be adjusted to
reflect changes in the present value of the estimated future net cash flows
attributable to the Proved Reserves of the Partnership after October 1, 1998,
although oil and gas prices in subsequent periods may differ from the prices
used on the date of the reserve reports.
No Fractional Shares. No fractional shares will be issued in
connection with the Exchange Offer. An Investor who would otherwise be entitled
to a fractional share of Series C Preferred will be paid cash in lieu of such
fractional shares.
Inherent Uncertainties in Estimating Reserves and Future Net
Cash Flows. The present value of estimated future net cash flows from Proved
Reserves of the Partnership, a significant factor considered in determining the
Exchange Value, cannot be determined with a high degree of certainty. There are
numerous uncertainties inherent in estimating quantities of Proved Reserves and
on projecting future rates of production, future development, recompletion and
workover expenditures, prices to be received upon the sale of oil and gas and
costs to be incurred in production. The data set forth in the Gruy Report,
included in Exhibit "A" to this Prospectus, represent estimates only and may
vary materially from the quantities of oil and gas actually recovered and the
future net cash flows received upon the sale thereof. Middle Bay's use of the
Gruy Report in determining the Exchange Value could, therefore, result in an
undervaluation of the Partnership Units.
- 21 -
<PAGE> 36
Changes in Form and Nature of Investment Vehicle and Related
Tax Status. The Partnership and its Predecessor Partnerships since inception
have been operated as partnerships under the Internal Revenue Code. Upon
consummation of the Exchange, the assets of the Partnership will be owned and
operated by Middle Bay, a "C" corporation which is subject to federal and state
income taxes. Unlike distributions from the Partnership, dividends of the
Series C Preferred shares are subject to tax at the Middle Bay corporate level
and at the individual shareholder level. Unitholders rights with regard to
distributions and matters governing control and management of the business and
assets of the Partnership will no longer be determined by the Partnership
Agreement and New Jersey partnership law but will be controlled by the Articles
of Incorporation and Bylaws of Middle Bay and the Alabama Business Corporation
Act. The Series C Preferred is generally nonvoting except on matters which
would adversely affect any holder's rights or preferences. Unitholders
presently have the right to vote on and may by vote of a majority in interest
approve or disapprove or take certain actions, including amendments to the
Partnership Agreement, the sale of all or substantially all of the assets of
the Partnership and removal of the General Partner. See "Corporate Governance
of Middle Bay" and "Comparative Rights of Security Holders."
Changes in Business Risks. Upon consummation of the Exchange
Offer, former Unitholders (except those who choose to elect their dissenters'
or appraisal rights) will be shareholders of Middle Bay which, as a
corporation, has historically retained and for the foreseeable future intends
to retain any earnings and cash flow to support the growth of its business and
to leverage its acquisition of new exploratory, developmental and producing
properties through the use of debt financing. The Partnership's business and
investment objectives have been primarily to invest in and receive income from
interests in producing oil and gas properties without incurring debt or
subjecting itself to the risks of exploratory drilling. Accordingly,
Unitholders who become shareholders of Middle Bay will be subject to different
and greater risks from those associated with an investment in the Partnership.
See "Risks Related to Middle Bay," below.
RISKS RELATED TO MIDDLE BAY
Potential Decline in Market Price of Middle Bay Securities.
The Exchange Value of $10.64 per Unit together with the cash distributions of
$5.85 per Unit paid by the Partnership since its consolidation in July, 1997 to
date total $16.49 per Unit compared to an Investor's average initial investment
of $10.00 per Unit at the time of consolidation in July, 1997. There is
presently no trading market in the Series C Preferred, and there can be no
assurance that a trading market will develop following the Exchange. Investors
would be exposed to a loss on their investment if the market price for the
Series C Preferred or the underlying common stock declines below the Unit
Exchange Price. Further, the Conversion Ratio of one share of common stock for
each Preferred Share represents an assumed value upon conversion of the
underlying common stock of at least $5.00 per share. The market price for the
common stock fluctuated during 1997 from a high of $12 per share to a low of
$5-1/2 per share, with an average daily trading volume of 2,762 shares, and has
fluctuated from a high of $10 per share to a low of $3 per share during 1998.
See "Price Range of Common Stock, Dividends and Distributions." Continued
depressed prices in the oil and gas industry in general and the effect of those
lower prices on Middle Bay in particular could also adversely affect the market
price of the common stock. A downturn in the general economic and stock market
conditions or in the drilling record and production performance of Middle Bay
or results of operations for Middle Bay that are lower than expected by the
marketplace could be expected to have a similar impact on the common stock. The
estimated number of shares
- 22 -
<PAGE> 37
of Series C Preferred offered in exchange for Partnership Units has been
determined by dividing the Exchange Value of the assets of the Partnership by
the Series C Preferred liquidation value of $5.00 per share. The Exchange Value
was determined by Middle Bay in reliance upon the Gruy Report and the
determination of fairness by an independent investment banking firm. See "The
Exchange Value - Fairness Opinion."
Losses From Operations. The historical financial data for
Middle Bay reflect a net loss of $16,184,032 for the year ended December 31,
1997 and net income of $205,500 for the year ended December 31, 1996, a net
loss of $2,148,628 for the six months ended June 30, 1998 and a net loss of
$387,510 for the six months ended June 30, 1997. Middle Bay had total revenues
of $11,432,995 and $4,886,421 for the years ended December 31, 1997 and 1996,
respectively, and $4,808,104 and $1,851,408 for the three months ended June 30,
1998 and 1997, respectively. The substantial loss for the year ended December
31, 1997 was due primarily to a noncash charge against the carrying value of
certain of Middle Bay's oil and gas properties for impairment of values due to
lower future cash flows expected from such properties attributable to lower oil
and gas prices and other factors. Middle Bay's ability to maintain its
financing arrangements, produce its oil and gas reserves and service its debt
obligations could be adversely affected by a continuing lack of profitability.
Any improvement in profitability of Middle Bay will be dependent upon, among
other factors, improvement in the development of reserves and production
therefrom, results of exploratory drilling and oil and gas pricing, and there
can be no assurance that such improvement will occur.
Inherent Uncertainties in Estimating Reserves and Future
Revenues. This Prospectus contains estimates of Middle Bay's oil and gas
reserves and the future net revenues therefrom which have been prepared by
various independent petroleum engineers. Estimates of commercially recoverable
oil and gas reserves and of future net cash flows derived therefrom are based
upon a number of variable factors and assumptions, such as historical
production from the subject properties, comparison with other producing
properties, the assumed effects of regulation by government agencies and
assumptions concerning future operating costs, severance and excise taxes,
abandonment costs, development costs and workover and remedial costs, all of
which may vary considerably from actual results. All such estimates are to some
degree speculative, and various classifications of reserves are only attempts
to define the degree of speculation involved. For these reasons, estimates
prepared by different engineers or by the same engineers at different times of
the commercially recoverable reserves of oil and natural gas attributable to
any particular property or group of properties, the classification, cost and
risk of recovering such reserves and estimates of the future net cash flows
expected therefrom may vary substantially. Therefore, Middle Bay's actual
production, revenues, severance taxes, development expenditures, workover and
remedial expenditures, abandonment expenditures and operating costs with
respect to its reserves will likely vary from such estimates, and such
variances may be material.
In addition, actual future net cash flows will be affected by
factors such as actual production, supply and demand for oil and natural gas,
availability and capacity of gas gathering systems and pipelines, curtailments
in consumption by natural gas purchasers, changes in governmental regulations
or taxation and the impact of inflation on costs. The timing of actual future
net revenues from proved reserves, and thus their actual present value, can be
affected by the timing of the incurrence of expenditures in connection with
development of oil and gas properties. The 10% discount factor, which is
required by the SEC to be used to calculate present value for reporting
purposes, is not necessarily the most appropriate discount factor based
- 23 -
<PAGE> 38
on interest rates in effect from time to time and risks associated with the oil
and gas industry. Discounted present value, no matter what discount rate is
used, is materially affected by assumptions as to the amount and timing of
future production, which may and often do prove to be inaccurate.
Development of Additional Reserves. Middle Bay's future
success may also depend upon its ability to find or acquire additional oil and
gas reserves that are economically recoverable. Except to the extent that
Middle Bay conducts successful exploration or development activities or
acquires properties containing Proved Reserves, the Proved Reserves of Middle
Bay will generally decline as reserves are produced. There can be no assurance
that Middle Bay will be able to discover additional commercial quantities of
oil and gas or that Middle Bay will be able to continue to acquire interests in
underdeveloped oil and gas fields and enhance production and reserves by
conducting workovers and recompletions, drilling replacement wells and drilling
development wells or that Middle Bay will have success drilling productive
wells and acquiring underdeveloped properties at economical prices.
Retention and Attraction of Key Personnel. Middle Bay depends
to a large extent on the abilities and continued participation of certain key
employees, the loss of whose services could have a material adverse effect on
Middle Bay's business. In an effort to minimize the risk, Middle Bay has
entered into employment agreements with certain key employees, including John
J. Bassett, President and Chief Executive Officer. Furthermore, as a result of
Middle Bay's recent growth, Middle Bay is currently seeking additional
accounting and operating personnel. There can be no assurance that Middle Bay
will be able to attract and retain such personnel on acceptable terms, and the
failure to do so could have a material adverse effect on Middle Bay.
Potential Effective Control of Middle Bay by Single
Shareholder. Kaiser-Francis Oil Company ("Kaiser-Francis"), an independent,
privately-owned company, owns approximately 39% of Middle Bay's presently
outstanding common stock and, should it desire to do so, could effectively
control Middle Bay through the election of its nominees as directors of the
Company or by exercising influence upon management decisions and policy.
Kaiser-Francis is a privately-held company whose majority shareholder is George
B. Kaiser. See "Corporate Governance of Middle Bay - Security Ownership of
Certain Beneficial Owners."
Potential Dilutive Effect of Authorized but Unissued Capital
Stock. As of September 30, 1998, there are 11,447,636 unissued shares of common
stock and 9,733,333 shares of preferred stock authorized under Middle Bay's
Articles of Incorporation for future issuance without shareholder approval.
1,500,000 of these additional shares of common stock have been reserved for
possible exercise of stock options described under "Compensation Under Plans,"
and 2,346,400 shares have been reserved for the possible conversion of the
Series C Preferred shares issuable pursuant to the Exchange. The remaining
additional shares of common or preferred stock may be issued by Middle Bay's
Board of Directors without shareholder approval for a variety of corporate
purposes, including possible future public or private offerings to raise
additional capital, to facilitate corporate acquisitions or for executive
incentive compensation.
Assuming all Unitholders accept the Exchange Offer and
convert their Series C Preferred into shares of common stock, Investors would
own 1,025,867 shares of Middle Bay common stock (excluding shares issuable to
Enex pursuant to the Exchange), or 10.7% of the then outstanding shares of
common stock.
- 24 -
<PAGE> 39
Investors' potential percentage ownership of Middle Bay shares of common stock
is subject to dilution when and as additional shares of currently authorized
but unissued common stock may be issued by Middle Bay for acquisitions or other
corporate purposes, including but not limited to the exercise of options or
warrants or the conversion of the outstanding Series B Preferred stock. See
"Description of Middle Bay Equity Securities Certain Effects of Authorized But
Unissued Shares."
Possible Delisting and Risk of Low-Priced Securities. Middle
Bay common stock is currently being quoted on the NASDAQ Small Cap Market under
the symbol "MBOC." Series C Preferred shares are expected to be approved for
listing, subject to official notice of issuance, on the NASDAQ Small Cap
Market. If Middle Bay is unable to satisfy the NASDAQ Small Cap Market
maintenance criteria in the future, its common stock and the Series C Preferred
shares could be delisted from trading on the NASDAQ Small Cap Market. If it did
not qualify for such listing, trading, if any, would thereafter be conducted in
the over-the-counter market in the so-called "pink sheets" or the "Electronic
Bulletin Board" of the National Association of Securities Dealers, Inc.
("NASD"), and consequently Investors could find it more difficult to dispose of
or to obtain accurate quotations as to the price of the Company's securities.
The Securities Enforcement and Penny Stock Reform Act of 1990
requires additional disclosure relating to the market and in connection with
trades in any stock defined as "penny stock." SEC regulations generally define
a penny stock to be an equity security that has a market price of less than
$5.00 per share, subject to certain exceptions. Such exceptions include any
equity security listed on NASDAQ and any equity security issued by an issuer
that has net tangible assets of at least $2,000,000, if such issuer has been in
continuous operation for three years. Unless an exception is available, the
regulations require the delivery, prior to any transaction involving a penny
stock, of a disclosure schedule explaining the penny stock market and the risks
associated therewith. The regulations also require that broker/dealers who
recommend such securities to persons other than established customers and
accredited investors must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale.
If Middle Bay's securities become subject to the regulations
applicable to penny stocks, the market liquidity for the Company's securities
could be severely affected. In such event, the regulations on penny stocks
could limit the ability of broker/dealers to sell Middle Bay's securities and
thus the ability of Investors to sell their Middle Bay securities in the
secondary market. Middle Bay's common stock was trading below $5.00 per share
for a portion of the quarter ended September 30, 1998, and the closing bid
price on the NASDAQ Small Cap Market for the common stock as of _________, 1998
was $_____ per share; however, Middle Bay does not expect its publicly-traded
securities to be subject to the penny stock rules because the common stock is
listed on the NASDAQ Small Cap Market (and the Series C Preferred is expected
to be so listed), and the Company's net tangible assets at September 30, 1998
were approximately $23,700,000.
RISKS RELATED TO THE OIL AND GAS INDUSTRY
Risk of Oil and Gas Operations. Middle Bay's operations are
subject to all of the risks normally incident to the operation and development
of oil and gas properties and the drilling of oil and gas wells, including
encountering unexpected formations or pressures, blowouts, cratering and fires
and, in
- 25 -
<PAGE> 40
horizontal wellbores, the increased risk of mechanical failure and collapsed
holes, the occurrence of any of which could result in personal injuries, loss
of life, environmental damages and other damage to the properties of Middle Bay
or others. In addition, because Middle Bay acquires interests in underdeveloped
oil and gas fields that have been operated by others for many years, Middle Bay
may be liable for any damage or pollution caused by any prior operations of
such oil and gas fields. In accordance with customary industry practice, Middle
Bay is not fully insured against these risks, nor are all such risks insurable.
Accordingly, there can be no assurance that such insurance as Middle Bay does
maintain will be adequate to cover all losses or exposure for liability.
Current Oil and Gas Industry Conditions. Historically, the
markets for oil and natural gas have been volatile and are likely to continue
to be volatile in the future. Prices for oil and natural gas are subject to
wide fluctuation in response to relatively minor changes in supply of and
demand for oil and natural gas, market uncertainty and a variety of
geopolitical and other factors that are beyond the control of Middle Bay. These
factors include political conditions in the Middle East and other countries,
the foreign supply of oil and natural gas, the price of foreign imports, the
level of consumer product demand, weather conditions, domestic and foreign
governmental regulations, the price and availability of alternative fuels and
overall economic conditions. Lower oil and natural gas prices also may reduce
the amount of Middle Bay's oil and natural gas that is economic to produce. In
addition, the marketability of Middle Bay's production depends upon the
availability and capacity of gas gathering systems and pipelines.
Government Regulation; Environmental Risks. Middle Bay's
business is regulated by certain federal, state, and local laws and regulations
relating to the development, production, marketing and transmission of oil and
gas, as well as environmental and safety matters. There can be no assurance
that laws and regulations enacted in the future will not adversely affect
Middle Bay's exploration for, or the production and marketing of, oil and gas.
Oil and gas operations are subject to extensive federal,
state and local laws regulating the discharge of materials into the environment
or otherwise relating to the protection of the environment. Numerous
governmental departments issue rules and regulations to implement and enforce
such laws which are often difficult and costly to comply with and which carry
substantial penalties for failure to comply. The regulatory burden on the oil
and gas industry increases its cost of doing business and consequently affects
its profitability. These laws, rules and regulations affect the operations of
Middle Bay. Compliance with environmental requirements generally could have a
material adverse effect upon the capital expenditures, earnings or competitive
position of Middle Bay.
Competition. The oil and gas exploration and production
business is highly competitive. A large number of companies and individuals
engage in the drilling for and production of oil and gas, and there is a high
degree of competition for desirable oil and gas properties suitable for
drilling and for materials and third-party services essential for their
exploration and development. Many of Middle Bay's competitors have greater
financial and other resources than does Middle Bay.
- 26 -
<PAGE> 41
PRICE RANGE OF MIDDLE BAY COMMON STOCK,
DIVIDENDS AND DISTRIBUTIONS
Middle Bay's common stock has been on the National Association of
Securities Dealers, Inc. Automated Quotation System ("NASDAQ Small Cap Market")
under the symbol "MBOC" since September 29, 1995. As of September 30, 1998,
there were 8,530,592 shares of Middle Bay common stock issued and outstanding.
There is no public market for the Partnership Units; however, Middle Bay has
applied for inclusion of the Series C Preferred on the NASDAQ Small Cap Market.
The following table sets forth, for the calendar quarters indicated, the high
and low sales prices for Middle Bay common stock reported on the NASDAQ Small
Cap Market:
<TABLE>
<CAPTION>
High Low
---- -----
<S> <C> <C> <C>
1995:
Third Quarter 4 1/8 3 5/8
Fourth Quarter 4 1/8 2 3/4
1996:
First Quarter 3 1/4 2 3/4
Second Quarter 3 3/8 2 1/2
Third Quarter 4 2 1/2
Fourth Quarter 5 3/4 3
1997:
First Quarter 9 5 1/2
Second Quarter 12 7 3/4
Third Quarter 11 1/4 9
Fourth Quarter 11 1/8 9 3/4
1998:
First Quarter 10 5 3/4
Second Quarter 8 5 1/16
Third Quarter 5 1/8 3
</TABLE>
Middle Bay's policy is to retain any earnings and cash flow to support
the growth of Middle Bay's business. Accordingly, the Board of Directors of
Middle Bay has never declared cash dividends on its common stock and does not
plan to do so in the foreseeable future. Furthermore, the terms of Middle Bay's
debt agreements prohibit the payment of cash dividends on Middle Bay's common
stock.
The Partnership makes cash distributions to Investors from Partnership
cash flow. The following table sets forth the amount of cash distributions paid
per Unit by the Partnership to its Investors during the periods indicated:
- 27 -
<PAGE> 42
<TABLE>
<CAPTION>
1997 1998
---- ----
(through October 31)
<S> <C>
$ 3.07 $ 2.78
</TABLE>
The last distribution made by the Partnership was in October, 1998.
On _______, 1998, the last full trading day preceding the filing of
the Exchange Offer, the closing bid price of Middle Bay's common stock on the
NASDAQ Small Cap Market was $______ per share. The Series C Preferred shares
are expected to be approved for listing, subject to official notice of
issuance, on the NASDAQ Small Cap Market. However, there is no present trading
market in the Series C Preferred, and there can be no assurance that a trading
market will develop following consummation of the Exchange Offer.
Because the market price for Middle Bay's common stock is subject to
fluctuation, the market value of the common stock underlying the Series C
Preferred that an Investor will receive in connection with the Exchange Offer
may increase or decrease prior to the Exchange. Holders of Partnership Units
are urged to obtain current market quotations for the Middle Bay common stock.
THE EXCHANGE OFFER AND PROPOSAL
DESCRIPTION OF THE EXCHANGE OFFER
Middle Bay is offering to exchange Series C Preferred for Partnership
Units in the Partnership (the "Exchange"). Investors who tender their
Partnership Units will receive the number of shares of Series C Preferred set
forth below. In connection with the Exchange Offer, Middle Bay is submitting a
Proposal to Investors in the Partnership to amend the Partnership Agreement to
provide for the transfer of all of the assets and liabilities of the
Partnership to Middle Bay as of the October 1, 1998 Effective Date in exchange
for Series C Preferred and the pro-rata distribution of such consideration in
liquidation of the Partnership.
If the Exchange Offer is consummated, each holder of a Unit who
tenders his Units in connection with the Exchange Offer will receive 2.128
shares of Series C Preferred whose liquidation value, in the aggregate, is
equal to $5.00 per share ($10.64 per Unit). Fractional shares of Series C
Preferred will not be issued in connection with the Exchange Offer or
liquidation of the Partnership. A partner in the Partnership otherwise entitled
to a fractional share of Series C Preferred will be paid in cash in lieu of
such fractional share.
THE PROPOSAL
Middle Bay is submitting to Investors in the Partnership the Proposal
to adopt an amendment to the Partnership Agreement annexed as Exhibit "B" to
this Prospectus. The amendment, if adopted by the Partnership in accordance
with amendment procedures in the Partnership Agreement, as amended, will
provide for the following steps:
- 28 -
<PAGE> 43
1) The transfer to Middle Bay, in exchange for the Series C
Preferred set forth below, of all of the assets of the
Partnership and the assumption by Middle Bay of all
liabilities of the Partnership, effective as of the Effective
Date.
2) The dissolution of the Partnership and the distribution to
Investors of the Series C Preferred allocable to their
interests in liquidation promptly following the Closing Date.
Each Investor who tenders his Partnership Units pursuant to the
Exchange Offer will, by that tender, consent to the proposal for the
Partnership. If the Partnership adopts the Proposal by the consent of a
prescribed majority (60% or greater) of the Partnership Units in the
Partnership, all Investors in the Partnership, whether or not they tendered
their Units in the Exchange Offer, will receive the same amount of Series C
Preferred as they would have received had they tendered their Partnership
Units. Consummation of the Exchange Offer is conditioned upon approval by the
Partnership of the Proposal. Because Middle Bay controls (through the General
Partner) Partnership Units in excess of 50% of the total outstanding Units and
because Middle Bay has indicated it will cause those Units to approve the
Exchange Offer, approval of the Proposal is more than likely assured. Investors
who do not return a completed Letter of Transmittal will not receive Middle Bay
Series C Preferred until Middle Bay has distributed and Investors have returned
an executed Transfer Application issuable to them in the Exchange, which may
result in a delay in receiving the Series C Preferred if the Transfer
Application is not properly returned.
TIMING OF SERIES C PREFERRED ISSUANCE
Assuming that the Proposal is adopted and the Exchange Offer is
consummated, Middle Bay will have the benefit of the Partnership's assets and
associated cash flows commencing on the Effective Date. The Series C Preferred
issued in the Exchange will be freely transferable immediately following
issuance; however, there presently is no trading market in the Series C
Preferred, and there is no assurance that a trading market will develop
following the Exchange.
On the Closing Date, Middle Bay will cause certificates representing
the Series C Preferred issuable in the Exchange to be registered in the name of
the holders who have accepted the Exchange Offer. Middle Bay will also cause a
certificate representing the shares of Series C Preferred that will be issued
to participants upon liquidation of the Partnership to be issued in the name of
the Partnership, pending dissolution, liquidation and winding-up of the
Partnership. Immediately thereafter, Middle Bay will cause the shares of Series
C Preferred issued in the name of the Partnership to be transferred into
certificates representing Series C Preferred registered in the names of the
individual participants remaining in the Partnership following liquidation.
CONDITIONS TO THE EXCHANGE OFFER
Middle Bay may, in its sole discretion, at any time on or prior to the
Closing Date, refuse to consummate, abandon or terminate the Exchange Offer and
withdraw the Proposal after the date of this Prospectus if (1) a material
change shall have occurred or been threatened (or any development shall have
occurred or been threatened involving a prospective material change) affecting
(or likely to affect) the business or properties of Middle Bay or the
Partnership, or (2) Investors representing more than 175,000 Units elect to
- 29 -
<PAGE> 44
pursue appraisal or dissenters' rights, or (3) if Middle Bay shall have become
aware of any facts or circumstances that have or may have material adverse
significance with respect to Middle Bay's operations. If any event shall occur
or any matter shall have been brought to the attention of Middle Bay that, in
the sole judgment of Middle Bay, materially affects the Partnership, whether
adversely or otherwise, or the Exchange Offer for Interests in the Partnership,
Middle Bay may refuse to accept tenders of Interest in the Partnership or may
modify or amend the Exchange Offer to take the event or matter into account.
For purposes of conditions (1) and (3) above, the term "material" shall be
construed to mean a condition existing or threatened which, in the judgment of
Middle Bay, has caused or is likely to cause a 5% or greater decrease in the
Exchange Value of the Units or a 5% or greater decrease in Middle Bay's
anticipated net revenues or cash flow from the Partnership's properties for
1999.
The absence of a material change affecting Middle Bay or the
Partnership and the limitation on the number of dissenters are the only
material conditions to the Exchange Offer. If those conditions have not been
fulfilled or the Exchange Offer is withdrawn by Middle Bay, each Letter of
Transmittal tendering an Interest or consenting to the Proposal will be void,
and no Series C Preferred will be issued in Exchange for the Interests in the
Partnership.
REGULATORY APPROVALS
Upon effectiveness of the registration statement of which this
prospectus constitutes a part, federal or state regulatory approval is required
in connection with the Exchange Offer or the adoption of the Proposal by the
Partnership.
LIMITED APPRAISAL AND DISSENTERS' RIGHTS
Unitholders who do not vote in favor of or who oppose the Proposal
will have certain appraisal and dissenters' rights. Such Investors will have
the option to receive cash in lieu of the Series C Preferred based on the
liquidation value determined by Middle Bay based on the Gruy Report and
assuming an orderly liquidation of the Partnership's assets over a one-year
period. Such rights are not required by New Jersey partnership law, and the
appraisal rights afforded Investors are those provided by the Partnership
Agreement. The liquidation value per Unit for purposes of those Unitholders
electing to receive cash for their Units has been determined to be $9.17. Such
Unitholders shall be entitled to receive cash payment for their tendered Units
within 30 days of the completion of the Exchange Offer. See the Gruy Report
included herewith for a detailed explanation of the determination of
liquidation value.
Unitholders residing in California will be afforded the option to
elect limited dissenters' rights in accordance with the requirements for
roll-up transactions under the California Code. By voting against the Proposal,
Investors in the State of California who choose to exercise their California
dissenters' rights will receive the cash equivalent of the Exchange Value of
their interests. If that cash amount is greater than the liquidation value of
the Units, dissenting California Investors will receive more cash than they
would otherwise receive by electing appraisal rights under the Partnership
Agreement. California Investors hold less than 1% of the Interests in the
Partnership, and the impact of the exercise of appraisal rights or dissenters'
rights under
- 30 -
<PAGE> 45
California law is not likely to materially affect the number of shares of
Series C Preferred issued or cash paid pursuant to appraisal or dissenters'
rights by Middle Bay in connection with the Exchange Offer.
DISTRIBUTION OF SERIES C PREFERRED
Each Investor who returns a completed Letter of Transmittal, even if
he withholds consent to the Proposal, will thereby have provided to Middle Bay
the necessary information to issue the Series C Preferred provided the Exchange
Offer is consummated. Assuming that the Proposal is adopted by the Partnership
and the Exchange Offer is consummated, Investors who have not otherwise chosen
to exercise their dissenters' or appraisal rights and who have returned a
completed Letter of Transmittal will receive the Series C Preferred issuable to
them in the Exchange promptly after the Closing Date.
An Investor who does not return a completed Letter of Transmittal will
not be eligible to receive the Series C Preferred after the Closing Date, if
the Exchange and Proposal are approved. Instead, the Series C Preferred
attributable to that Investor's Partnership Units will be held of record by the
Partnership. Immediately after the Closing Date, Middle Bay will deliver a
Transfer Notice to each Investor who has not returned a Letter of Transmittal.
The Transfer Notice should be completed and returned to Middle Bay promptly.
Upon return of the executed Transfer Notice, Middle Bay will have the Series C
Preferred transferred and delivered to the Investor.
INTERESTS OF CERTAIN PERSONS IN THE EXCHANGE AND PROPOSAL
In considering the recommendation of the General Partner, Investors
should be aware that the General Partner has interests in the Exchange that are
in addition to the interests of the Partnership and the Investors generally.
Middle Bay controls and has a common Board of Directors with the General
Partner of the Partnership, and its determination of the Exchange Value
involves an inherent conflict of interest. Both the General Partner and Middle
Bay owe fiduciary duties to the Investors in the Partnership. In addition,
Middle Bay and Enex owe a duty to their respective stockholders. While Middle
Bay believes that it has fulfilled these fiduciary obligations for itself and
Enex in its determination of the Exchange Value, which is supported, in part,
by the Gruy Report and the Fairness Opinion, no degree of objectivity or
professional competence can eliminate the inherent conflict of interest.
RESALE OF MIDDLE BAY SERIES C PREFERRED
Issuance of the Middle Bay Series C Preferred to be received by
Investors who tender their Partnership Units and the shares to be received by
Unitholders in liquidation of the Partnership will be registered under the
Securities Act. Middle Bay has applied for listing of the Series C Preferred
shares on the NASDAQ Small Cap Market, subject to notice of issuance, and such
application is expected to be approved. Subject to the availability of a
trading market (of which there can be no assurance), the Series C Preferred
shares may be traded freely and without restriction by those Investors of the
Partnership not deemed to be an "affiliate" of the Partnership, as that term is
defined in the rules under the Securities Act. "Affiliates" are generally
defined as persons who control, are controlled by or are under common control
with the Partnership at the time of the Exchange. Accordingly, "affiliates"
generally will include the General Partner and any Investor who owns in
- 31 -
<PAGE> 46
excess of 10% of the Partnership Interests. Middle Bay Series C Preferred
received by those Investors who are deemed to be "affiliates" of the
Partnership may be resold without registration as provided by and subject to
the limitations of Rules 144 and 145 of the SEC, or as otherwise permitted
under the Securities Act. This Prospectus does not cover any resales of Middle
Bay Series C Preferred received by affiliates of the Partnership or by certain
family members or related interests. Any Unitholder who becomes an affiliate of
Middle Bay will be subject to similar restrictions under Rule 144.
FRACTIONAL SHARES
No fractional shares of Middle Bay Series C Preferred will be issued.
Fractional share interests which would otherwise be issuable shall entitle the
holder thereof to receive, in lieu of such fractional interest, an amount of
cash equal to the product of such fraction multiplied by the price of Middle
Bay Series C Preferred used in the Exchange Value. Payment for fractional
shares will be made concurrently with the issuance of the Series C Preferred
shares.
RESALES OF SERIES C PREFERRED; STOCK MARKET LISTING
All of the currently issued and outstanding shares of common stock of
Middle Bay are admitted for trading and quoted on the NASDAQ Small Cap Market,
and application has been made to the National Association of Securities
Dealers, Inc. for admission for trading on the NASDAQ Small Cap Market of the
shares of Series C Preferred to be issued in connection with the Exchange
Offer. There can be no assurance, however, that a trading market will develop
in the Series C Preferred shares or that, in the event a trading market
develops, at what price the Series C Preferred may be sold.
ACCOUNTING TREATMENT
The Exchange will be accounted for as a purchase by Middle Bay.
Accordingly, the purchase price will be allocated to assets and liabilities
based on their estimated fair values as of the date of acquisition.
CLOSING DATE
The Exchange Offer is expected to be consummated on the Closing Date,
which will be no more than five days following the Expiration Date. Middle Bay
may withdraw the Exchange Offer at any time prior to the Expiration Date under
certain circumstances, including the existence of any state or federal statute,
rule, regulation or order or entry of any judicial or administrative order that
would prohibit the transaction contemplated by the Exchange Offer and the
Proposal. The Exchange Offer to the Partnership is conditioned upon consent of
a majority of the Units to the Proposal and the absence of any material adverse
development affecting the Partnership, as determined by Middle Bay in its sole
discretion (see "The Exchange Offer and Proposal - Conditions to the Exchange"
herein). On the Closing Date, subject to satisfaction of these conditions and
the condition that holders of not more than 175,000 Units elect to exercise
dissenters' rights, Middle Bay intends to accept all Units validly tendered and
not withdrawn pursuant to the Exchange Offer.
- 32 -
<PAGE> 47
OPERATIONS AFTER THE EXCHANGE
Middle Bay is an independent oil and gas company engaged in the
acquisition of producing properties and the exploration, development and
production of oil and gas in the contiguous United States, primarily in the
Mid-Continent and Gulf Coast regions. Upon consummation of the Exchange ,
Middle Bay will operate the acquired Partnership assets as it operates its oil
and gas properties or may sell such assets to third parties at any time.
EXPENSES; FEES
All expenses incurred in connection with the Exchange Offer and the
Proposal and the transaction contemplated thereby will be paid by Middle Bay.
Middle Bay will pay the expenses incurred in connection with the Exchange Offer
and will pay all fees and expenses in connection with this Prospectus,
including fees and expenses payable in connection with the Registration
Statement of which this Prospectus is a part.
MIDDLE BAY'S DIVIDEND POLICY
Series C Preferred. The holders of Series C Preferred are entitled to
cumulative cash dividends of $.50 per annum, payable semi-annually on March
31st and September 30th of each year (measured by Middle Bay's fiscal year). No
dividends may be authorized or paid or set apart for payment or other
distribution of cash or other property authorized or made directly or
indirectly by Middle Bay with respect to any shares of Middle Bay common stock
or other junior securities of Middle Bay unless the full cumulative dividends
on all outstanding shares of Series C Preferred shall have been paid or such
dividends have been authorized and set apart for payment with respect to the
Series C Preferred shares.
Common Stock. Middle Bay's policy is to retain its earnings and cash
flow to support the growth of Middle Bay's business. Accordingly, the Board of
Directors of Middle Bay has never declared cash dividends on its common stock
and does not plan to do so in the foreseeable future. Furthermore, the terms of
its credit agreement with its principal lender prohibit the payment of cash
dividends on Middle Bay's common stock.
METHOD OF DETERMINING EXCHANGE VALUE
GENERAL
H.J. Gruy and Associates, Inc. ("Gruy") is the independent petroleum
engineering firm most familiar with the properties in which the Partnership has
interests and has prepared the annual reserve report on the Partnership's
reserves since inception of the Partnership and its Predecessor Partnerships.
Gruy is actively involved in the evaluation of producing oil and gas properties
and is widely recognized in its field. Gruy is an independent consulting firm
as provided in the Standards Pertaining to the Estimating and Auditing of Oil
and Gas Reserves Information promulgated by the Society of Petroleum Engineers.
- 33 -
<PAGE> 48
The Exchange Value has been assigned to the Partnership Units to
determine the number of shares of Series C Preferred to be offered for
Partnership Units. The Exchange Value was determined by Middle Bay in reliance
upon the Gruy Report and is not the result of negotiations with independent
representatives of the Partnership. Accordingly, the Exchange Value may not
reflect the value of the Partnership Units or the value of the Partnership
properties if all the assets were to be sold to an unaffiliated third party or
parties in an arm's- length transaction. Middle Bay did not seek third-party
bids for the sale of the Partnership's assets. Management of Middle Bay has
substantial experience in evaluating and operating oil and gas properties in
the Partnership's production areas and believes on the basis of that experience
that the methodology employed by Gruy in determining the fair market value of
the Proved Reserves of the Partnership is fair to Investors and is considered
in the oil and gas industry as being favorable to sellers of producing
properties.
Middle Bay did not instruct Gruy as to pricing, cost or other economic
parameters or methods or the assessment of reserve characteristics, nor did it
limit the scope of Gruy's investigation for purposes of preparing the fair
market value appraisal. Middle Bay provided Gruy with basic evaluation data for
its use in determining the Partnership's reserves and their value. Gruy
prepared its own reserve estimate of the Partnership's properties. Middle Bay
did not direct Gruy as to the amount of consideration to be paid to the
Partnership for its property interests nor provide any information to Gruy on
amounts to be paid to Unitholders. The amount of consideration to be paid was
determined by Middle Bay's Board of Directors based upon Gruy's estimates of
the fair market value of those interests. Gruy did not opine on the fairness of
the transaction to Unitholders; however, Middle Bay did acquire an independent
report and opinion regarding the fairness to Unitholders of the consideration
for which the Partnership's assets will be sold to Middle Bay if the Proposal
is approved by Unitholders.
The number of shares of Series C Preferred to be issued pursuant to
the Exchange Offer has been determined relative to a Total Exchange Value
assigned to the Partnership Units of $10.64 per Unit. The number of shares of
Series C Preferred offered in exchange for Partnership Units will be determined
by dividing the Total Exchange Value of the assets of the Partnership by $5.00,
which is the liquidation value per share of the Series C Preferred.
The Total Exchange Value reflects the fair market value of Proved
Reserves of the Partnership's oil and gas assets (as determined by Gruy) and
all other assets and liabilities of the Partnership (including probable and
possible reserves). These components reflect (i) the estimated fair market
value of future net cash flows from Proved Reserves, plus probable and possible
reserves, of the Partnership as of September 30, 1998, discounted 10% per year
and calculated with escalated prices and costs, (ii) the net book value of
current assets and liabilities of the Partnership as of September 30, 1998 and
(iii) the general intangibles of the Partnership. Based on management's
experience in evaluating reserve acquisition opportunities and transactions in
the Partnership's production areas, Middle Bay believes that the components of
the Exchange Value reflect all appropriate valuation criteria for the
Partnership in accordance with industry practice. Each component of the
Exchange Value is presented for the Partnership in the tables and discussions
below.
- 34 -
<PAGE> 49
EXCHANGE VALUE COMPONENTS
The following table sets forth the Exchange Value components,
determined as of September 23, 1998:
<TABLE>
<S> <C>
Fair market value of Proved Reserves
of oil and gas properties(1) $10,380,000
Current assets, less current liabilities(2) 1,250,000
General intangibles(3) 100,000
-----------
Exchange Value $11,730,000
</TABLE>
(1) As determined by Gruy.
(2) Estimated based on unaudited September 30, 1998 financial statements
prepared by Middle Bay.
(3) As determined by Middle Bay.
The estimated net book value of the Partnership as of September 30,
1998 was $9,140,412 after deducting 1998 distributions aggregating $3,068,166.
The current net assets are based upon the Partnership's September 30, 1998
unaudited financial statements, respectively, maintained in accordance with
applicable provisions of the Partnership Agreement.
Middle Bay has assigned nominal value to the Partnership's equipment
(comprised of oil and gas production and processing facilities) on the
assumption that its salvage value at the end of the commercial lives of
acquired wells will approximate the cost of plugging and abandoning the wells,
contingent liabilities which Middle Bay is assuming. Middle Bay also believes
that valuing the current assets and liabilities of the Partnership at their
book value as of September 30, 1998 is appropriate to reflect the fair market
value of these items in the stated amounts reflected in the Partnership's
unaudited balance sheet as of that date.
The calculation of the fair market value of the Partnership's Proved
Reserves for the purpose of determining the Exchange Value was estimated using
the income approach as opposed to the market data approach because it is
difficult to identify sales of oil and gas properties that are comparable in
net reserves, product prices, location, operating expenses and operator
expertise. For the proved producing properties, the discounted future net
revenue is reduced to a fair market value by multiplying by a suitable fraction
that accounts for the risk associated with an investment. For proved developed
nonproducing and proved undeveloped reserves, the present value of the required
capital is added to the discounted future net revenue, a suitable risk factor
is applied, and the present value of the capital is subtracted from that value.
This approach assumes that the capital is invested with certainty and the
resulting cash flow stream is burdened with the uncertainty. In all cases, the
payout time and the internal rate-of-return for each fair market value estimate
are computed and compared with that which a rational investor would expect.
The net quantities of Proved Reserves attributable to the
Partnership's interest in its wells, together with the estimated fair market
value of those reserves, were estimated as of September 23, 1998 in the report
prepared by Gruy. A copy of the report, which also sets forth the criteria and
assumptions used in evaluating the Partnership's Proved Reserves, is included
herewith in Exhibit "A."
There are numerous uncertainties inherent in estimating quantities of
Proved Reserves. Gruy prepared the data based on their evaluation of the total
Proved Reserves attributable to all of the wells in which the Partnership had
an interest as of September 23, 1998. Estimates by other independent petroleum
engineers could vary from the Gruy Report's estimates and could result in
higher or lower valuations.
- 35 -
<PAGE> 50
The estimates of the Partnership's future gross revenues attributable
to its estimated Proved Reserves as of September 23, 1998 were calculated based
on natural gas and crude oil prices in effect on that date with certain
escalations. Those prices had a weighted average of $2.71 per Mcf for natural
gas and $16.47 per Bbl for oil.
Future operating and development costs were based on the Partnership's
operating and development costs as of September 23, 1998 and with certain
escalations as described in the Gruy Report. Future severance (production) and
ad valorem (property) taxes were calculated using rates prevailing at September
23, 1998. The estimated future gross revenues, future operating and development
costs and production taxes were allocated to the Partnership in accordance with
its interest in oil and gas properties, taking into account applicable
reversionary and overriding royalty interests.
The present values of the estimated net cash flows attributable to the
Partnership's Proved Reserves were calculated by discounting the future net
cash flows to present value at the rate of 10% per year, as adjusted in
accordance with the Partnership Agreement. The discount factor is intended to
reflect the timing of future net cash flows. No further discount or risk
adjustment was applied. Present value, regardless of the discount rate used, is
materially affected by assumptions as to timing of and prices obtained for
future production, which may prove to have been inaccurate.
The Gruy Report is included as Exhibit "A" to this Prospectus.
Estimates of the Partnership's Proved Reserves and of the present value of
future net cash flows from the reserves are estimates only and are based on
numerous assumptions and conditions of those estimates.
In determining the value attributed to general intangibles, Middle Bay
evaluated the success to date of the Partnership, total consideration paid to
date to the participants and the value to Middle Bay of dissolving and
liquidating the Partnership so that Middle Bay can focus on its current
operations and reduce the administrative burdens associated with operating the
Partnership. From inception through October, 1998, the Partnership has made
cash distributions to participants aggregating $6,455,865, or approximately
$5.85 per Unit.
The Exchange Value will not be adjusted to reflect changes after
September 23, 1998 in the present value of the estimated future net cash flows
attributable to the Partnership's Proved Reserves. No adjustments will be made
to the Exchange Value due to changes in demand for or costs or prices of oil
and gas that differ from the assumptions employed or other market-related
events after September 23, 1998, although those could affect the value of the
Units.
THE FAIRNESS OPINION
Harris Webb & Garrison, Inc. ("HWG") was retained by the Board of
Directors of Middle Bay to render an opinion (the "Fairness Opinion") to the
Board as to the fairness from a financial point of view of the consideration to
be received by the holders of Units in the Exchange. On October 15, 1998,
pursuant to Middle Bay's request, HWG delivered its written opinion to the
Board of Directors of Middle Bay to the effect that, as of the date of the
Opinion, the consideration to be received by Unitholders of the Partnership in
the Exchange was fair to such holders from a financial point of view. HWG has
consented to the use of its name and the Fairness Opinion in this Prospectus. A
copy of the HWG Fairness Opinion is included as Exhibit ___ to this Prospectus.
The summary of the Fairness Opinion set forth in this Prospectus is
qualified in its entirety by reference to the full text of such opinion.
Unitholders are urged to read the opinion in its entirety for assumptions made,
procedures followed, other matters considered and limits of the review by HWG.
In arriving at its opinion, HWG considered a possible range of fair value with
respect to the Units, and made its determination as to the fairness of the
consideration (shares of Series C Preferred Stock) based on the financial and
comparative analyses described below.
The HWG Fairness Opinion was prepared for the Board of Directors of
Middle Bay and is directed only to the fairness, from a financial point of
view, as of October 15, 1998, of the consideration to be received by
Unitholders in the Exchange. The HWG Fairness Opinion does not constitute a
recommendation to any Unitholders as to how to respond to the Proposal. In
addition, HWG was not asked to opine as to, and its opinion does not address,
the underlying business decision of the Board of Directors of Middle Bay or the
General Partner to proceed with or to effect the Exchange, nor did HWG
participate in the determination of the terms of the Proposal.
In connection with rendering its opinion, HWG, among other things: (i)
reviewed the Proposal in its substantially final form; (ii) reviewed Middle
Bay's and the Partnership's Annual Reports on Form 10-KSB for the fiscal year
ended December 31, 1997 and their respective Quarterly Reports on Form 10-QSB
for the periods ended March 31, 1998 and June 30, 1998; (iii) reviewed the Gruy
Report, along with certain operating and financial information provided to HWG
by management of the General Partner relating to the Partnership's properties,
business and prospects; (iv) discussed the Gruy Report with representatives of
Gruy; (v) met with certain members of the General Partner's senior management
to discuss their operations, historical financial statements and future
prospects; (vi) reviewed certain operating and financial information, including
projections, provided to HWG by management of Middle Bay relating to its
properties, business and prospects; (vii) reviewed the historical prices and
trading volumes of Middle Bay common stock; (viii) reviewed publicly-available
financial data and stock market performance data of companies that it deemed
generally comparable to Middle Bay; (ix) reviewed the terms of recent
acquisitions of publicly-held oil and gas assets and entities that it deemed
generally comparable to the Partnership; (x) reviewed the terms of outstanding
series of preferred stock which HWG believes to be comparable to the proposed
terms of the Series C Preferred Stock; and (xi) conducted such other studies
analyses, inquiries and investigations as it deemed appropriate.
In rendering its opinion, HWG assumed, without independent
verification, the accuracy, completeness and fairness of all financial and
other information that was available to it from public sources or that was
provided to it by Enex, Middle Bay, Gruy, or their representatives. HWG relied
upon the assurances of Enex and Middle Bay that they have no actual knowledge
of any facts that would make the Gruy Report or other information they provided
to HWG incomplete or misleading. Unitholders are cautioned, however, that the
valuations concerning the Partnership contained in the Gruy Report and the
information regarding Middle Bay's future prospects provided to HWG by Middle
Bay are based on numerous variables and assumptions that are inherently
uncertain. These include, without limitation, general economic conditions and
competitive conditions within the oil and gas industry and that the inclusion
of such information should not be regarded as an indication that Enex, Middle
Bay or any persons who received such information consider it other than an
estimate of future events. These financial projections are not publicly
available, to HWG's knowledge, and have not been disseminated to any party other
than HWG.
The Fairness Opinion is necessarily based on economic, market,
financial and other conditions as they existed on, and on the information made
available to it as of, the date of such opinion. It should be understood that,
although subsequent developments may affect its opinion, except as agreed upon
by Middle Bay, HWG does not have any obligation to update, revise or reaffirm
its opinion.
In arriving at its opinion, HWG did not perform any independent
appraisal of the assets of the Partnership or Middle Bay. In analyzing the
value of proved reserves of the Enex Partnership, HWG relied substantially on
the evaluations of H.J. Gruy and Associates in the Gruy Report. HWG also
reviewed a reserve evaluation prepared by management of Middle Bay using
pricing assumptions set forth in SEC rules prepared at the request of HWG as of
September 30, 1998. While HWG viewed these evaluations as important to their
fairness analysis, HWG did not view them as conclusive as to value of the Enex
Partnership, but rather one of many indications of value analyzed by HWG.
The following is a summary of the most significant factors considered
and the principal financial analyses performed by HWG to arrive at its opinion
dated October 15, 1998.
Value Range Comparison. HWG's fairness analysis was primarily that the
estimated fair market value range of "value received" by a
public Unitholder was within a range of value reasonably
equivalent to the estimated fair market value range of "value
surrendered." HWG's fair market value range for "value
received" was estimated to be $8.51 - $10.64 per Unit and
"value surrendered" was estimated to be $9.48 - $11.84 based
upon a Gruy Report fair market value of $10.4 million for the
Enex Partnership oil and gas reserves. HWG also noted that,
if the Gruy Report's orderly liquidation value of $8.9
million is substituted for the $10.4 million value, the HWG
range for "value surrendered" is reduced to $8.29 - $10.29
per Unit.
(2) Discounted Cash Flow Analysis Contained in the Gruy Report.
HWG considered the present value of the future cash flows
that the proved reserves of the Partnership could be expected
to generate after October 1, 1998 based on the Gruy Report.
(3) Analysis of Certain Other Publicly-Held Oil and Gas Entities.
HWG compared selected operating and financial ratios for the
Partnership to corresponding data and ratios for selected oil
and gas entities whose securities are publicly held and which
HWG believed were comparable in certain respects to the
Partnership. These entities were selected for comparison as
they are oil and gas entities with similar properties and
business characteristics to the Partnership. HWG calculated
the market capitalization and market value for each of the
following publicly traded companies: Abraxas Petroleum
Corporation, Coho Energy, Inc., Costilla Energy, Inc., Key
Production Company and Wiser Oil Company (collectively, the
"Comparable Companies"). For this purpose, HWG defined
"market capitalization" as market value of the relevant
company's common equity plus total debt less excess cash and
cash equivalents. HWG calculated the market capitalization of
each of the Comparable Companies as a multiple of each such
company's December 31, 1997 proved reserves, the latest
twelve months earnings (as of June 30, 1998) before interest,
taxes, depreciation, depletion, amortization, impairments and
costs ("EBITDX") and the present value of future net revenues
of proved reserves (before taxes) discounted at 10% (SEC
method pricing) ("SEC PV 10%"). The multiples yielded by such
calculations for the Comparable Companies were (i) with
respect to proved reserves, between $0.60 per Mcfe and $1.06
per Mcfe, (ii) with respect to the latest twelve months
EBITDX, between 4.1x and 8.8x and (iii) with respect to the
SEC PV 10% Value, between 86% and 130%. Applying these
multiples to the Partnership yielded a value range of $11.6 to
$16.3 million for 100% of the Partnership equity.
Because of the inherent differences between the businesses,
operations and the prospects of the Partnership and the
businesses, operations and prospects of the Comparable
Companies and the recent significant changes in the oil and
gas markets, HWG believed that it was inappropriate to, and
therefore did not, give significant weight to the
quantitative results of this analysis of comparable
companies.
(4) Comparable Convertible Preferred Stocks. HWG reviewed 22
publicly traded convertible preferred stocks and compared
yield and conversion premiums to the new Series C Preferred
Stock. When compared to these publicly traded convertible
preferred stocks, the proposed dividend yield of 10% and the
anticipated conversion premium of approximately 42 - 66% for
the new Series C Preferred Stock appear to indicate that the
fair market value of the new Preferred would be in the range
of approximately $4.00 to $5.00 per share.
(5) Comparable Transactions. HWG reviewed certain recent
transactions, but none were believed significantly comparable
to the Exchange to provide meaningful analysis. HWG did note,
however, a recent investment of $130 million in Triton Energy
made with an 8% preferred convertible at a premium of
approximately 20 - 50%.
In addition to the financial analyses set forth above, HWG considered
a number of qualitative factors in arriving at its opinion, including without
limitation, the following: (i) the Unit's limited liquidity and voting rights;
(ii) the potential capital appreciation of the Middle Bay common stock
underlying the Series C Preferred Stock; (iii) the predictable income stream of
the Series C Preferred Stock; (iv) the greater number and diversity of
properties of Middle Bay resulting from the Exchange; and (v) the priority of
the liquidation preference of the Series C Preferred Stock with respect to
Middle Bay common stock.
The summary set forth above is not a complete description of the
analyses performed by HWG. Preparation of the Fairness Opinion involved various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances.
Notwithstanding the separate factors summarized above, HWG believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and the factors considered by it, without considering all analyses and
factors, would create an incomplete view of the evaluation process underlying
its Fairness Opinion. In performing its analyses, HWG made numerous assumptions
with respect to oil and gas industry performance, market prices for oil and gas
and economic conditions and other matters. The analyses performed by HWG are
not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses.
The Board of Directors of Middle Bay selected HWG as its financial
advisor because HWG is a regionally recognized investment banking firm with
substantial experience in assignments similar to that undertaken with regard to
evaluating the Exchange. As part of its investment banking business, HWG is
regularly engaged in the valuation of business and securities in connection with
mergers, acquisitions, underwritings, sales and distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes.
Pursuant to an engagement letter with Middle Bay, HWG will be paid
$40,000 from Middle Bay for rendering the Fairness Opinion. Middle Bay has also
agreed to reimburse HWG for its reasonable out-of-pocket expenses, including
the reasonable fees and expenses of its legal counsel, and to indemnify HWG
against certain liabilities arising out of or in connection with the services
rendered by HWG under the engagement, including liabilities under federal
securities laws. The terms of the fee arrangement with HWG, which are customary
in transactions of this nature, were negotiated at arms length between Middle
Bay and HWG. HWG has performed financial advisory services for Middle Bay in
recent months for which it was paid an advisory fee of $20,000 by Middle Bay.
As part of these services, HWG performed a financial evaluation of Middle Bay.
As a result of that evaluation, HWG issued a research report and buy
recommendation with respect to the Middle Bay common stock.
- 36 -
<PAGE> 51
COMPARISON OF EXCHANGE VALUE WITH VALUES USED IN 1997 PARTNERSHIP ROLL-UP
H.J. Gruy & Associates, Inc. ("Gruy"), an independent petroleum
engineering firm, was engaged by Middle Bay and the General Partner to make a
fair market evaluation of the Partnership's oil and gas reserves as of October
1, 1998. Gruy is the same engineering firm which estimated the oil and gas
reserves for the Partnership and each of the Predecessor Partnerships in
connection with the 1997 consolidation of the Predecessor Partnerships into the
Partnership (the "1997 Roll-up"). Gruy's approach to determining the fair
market value of Proved Reserves for the Partnership for the Exchange Offer was
the same as for each of the partnerships which were consolidated in 1997 to
form the Partnership (the "Predecessor Partnerships") in connection with the
1997 Roll-up. However, Gruy assigned no fair market value to the categories of
probable and possible reserves for the Predecessor Partnerships, but did assign
a value for those categories of Partnership reserves for the Exchange Offer. To
the extent that the fair market evaluation for the Partnership's present
estimated reserves differs materially from the fair market valuation of the
Predecessor Partnerships' reserves in 1997, the primary causes of such changes
are the production and sale of oil and gas production and properties by the
Partnership and the decline in the market prices for oil and gas over the past
12 months.
REASONS FOR THE EXCHANGE OFFER
RECOMMENDATION OF THE GENERAL PARTNER
Middle Bay and the General Partner, acting together, have initiated
and proposed the Exchange Offer and recommend approval of the Proposal. The
decision to recommend approval of the Exchange Offer is based on the conclusion
that the Exchange will be more beneficial to Investors than the alternatives of
continuing the Partnership or liquidating all of the assets of the Partnership
and that the terms of the Exchange Offer and related Proposal, including the
method used to determine the Exchange Value and the procedures involved in the
Proposal, are both fair and appropriate.
- 40 -
<PAGE> 52
Middle Bay and Enex, acting together in reaching the conclusion to
recommend that each of the Investors accept the Exchange Offer and approve the
Proposal, considered a number of factors, including, without limitation, the
following:
(a) The fiduciary duties owed by Middle Bay and Enex to the
Unitholders. Both Middle Bay and Enex considered their fiduciary duties to the
Unitholders and their respective shareholders and the inherent conflicts of
interest each has in initiating and recommending acceptance of the Exchange
Offer. See "Recommendations of the Boards of Directors of Middle Bay and Enex,"
"Fiduciary Duties of the General Partner and Middle Bay" and "Conflicts of
Interest," below.
(b) The financial condition, results of operations and cash
flows of Middle Bay and the Partnership, both on a historical and a prospective
basis. In this regard, the General Partner believes that Middle Bay
historically, and on a pro-forma basis after acquisition of the Partnership's
assets, has been and is likely to continue in the future to be a growth
company, with prospects that could continue to show significant increases in
results of operations and cash flow, resulting in potential future appreciation
in the price of the common stock underlying the Series C Preferred shares. See
"Selected Financial Data - Middle Bay," "Selected Financial Data - Partnership"
and "Selected Pro Forma Consolidated Financial Information (Unaudited)."
(c) The consideration to be received by the Partnership's
Investors in connection with the Exchange Offer represents a significantly
higher distribution to Investors than could be expected from the present value
of continued total cash distributions or the distributions to Investors in
liquidation. Specifically, the General Partner estimates that cash
distributions for the life of the Partnership, if the Partnership were to
continue operations, would be $10.28 per Unit and would have a present value
(using a 10% discount rate) of $6.82 per Unit. See "Alternatives to the
Exchange."
(d) Dividends with respect to the Series C Preferred. The 10%
dividend rate on the Series C Preferred will result in Investors receiving
annual cash dividends of approximately $1.06 per Unit exchanged compared to
cash distributions from the Partnership of $4.02 per Unit during the 12-month
period ended September 30, 1998. However, the General Partner believes that the
cash distributions to Investors from the Partnership will likely decrease
rapidly as the remaining oil and natural gas reserves are depleted. See
"Alternatives to the Exchange."
(e) Current market conditions and historical market prices,
volatility and trading information with respect to the common stock of Middle
Bay compared to the lack of a trading market for the Partnership Units. In this
regard, the potential growth rate and market price to earnings and cash flow
potential of Middle Bay were considered. Middle Bay believes that Investors who
choose to convert their Preferred Shares will receive the benefit of any future
growth in the value of their equity interest in Middle Bay rather than
receiving cash distributions from the Partnership, which are likely to decrease
rapidly as the remaining oil and natural gas reserves of the Partnership are
depleted. See "Price Range of Middle Bay Common Stock; Dividends and
Distributions."
- 41 -
<PAGE> 53
(f) Potential Liquidity of the Series C Preferred and the
underlying common stock of Middle Bay compared to the lack of liquidity of the
Partnership Units. Middle Bay has applied for listing the Series C Preferred
for trading on the NASDAQ Small Cap Stock Market, subject to approval, although
there can be no assurance that an active trading market will develop following
the Exchange. The common stock of Middle Bay has an active trading market on
NASDAQ Small Cap Stock Market. The Partnership Units have no liquidity, and the
Partnership Agreement restricts transfer of the Partnership Units. See "Price
Range of Middle Bay Common Stock; Dividends and Distributions."
(g) The terms and conditions of the Exchange Offer, including
the amount of consideration to be paid to the Investors and the form of the
consideration, the parties' representations, warranties, covenants and
agreements, and the conditions to their respective obligations set forth in the
Exchange Offer. Middle Bay believes that the terms and conditions of the
Exchange Offer are favorable to the Partnership's Investors. In reaching this
conclusion, Middle Bay noted the nature of the representations and warranties,
the limited number of conditions in the Exchange Offer and the payment by
Middle Bay of all transaction costs and the assumption by Middle Bay of all
Partnership liabilities, including contingent and unforeseen liabilities.
Middle Bay believes that in the absence of extraordinary or unforeseen
circumstances, there is a high likelihood that the transaction will be
completed, subject to the requisite approval of the Partnership's Investors.
Accordingly, Middle Bay believes that the terms of the Exchange Offer are more
favorable to the Investors than purchase and sale agreements that are
customarily entered into. See "Alternatives to the Exchange" and "The Exchange
Offer and the Proposal."
(h) The review of other alternatives for the Partnership,
including possible sales of Partnership assets to third parties, continued
operation of the Partnership and liquidation of the Partnerships. Middle Bay
did not believe that the sale of all of the assets of the Partnership was as
attractive to the Partnership as the Exchange Offer because of the value of the
reserves being offered by Middle Bay in the Exchange Offer (as supported by the
Gruy Report and the Fairness Opinion), the uncertainty that a third-party
purchaser or purchasers could be found for all of the assets and, if found,
whether a purchase and sale agreement could be negotiated on terms favorable to
the Partnership. Middle Bay and Enex also considered that the Partnership's
reserve estimates could be undervalued. Middle Bay did not believe that
liquidation of the Partnership was as attractive to the Partnership as the
Exchange Offer because the estimated liquidation value of the Partnership is
substantially less than the consideration to be received by each of the
Investors under the Exchange Offer. Middle Bay did not believe that the
continued operation of the Partnership was as attractive to the Partnership as
the Exchange Offer because Middle Bay believes that the continued cash
distributions made by the Partnership are likely to decrease rapidly as the
remaining oil and natural gas reserves are depleted. See "Alternatives to the
Exchange."
(i) The uncertainties and risks in the oil and gas industry
and the possibility that changes in the industry or continued volatility of oil
and gas prices could have a significantly greater effect on the Partnership due
to the size of the Partnership compared to Middle Bay and the greater
diversification of oil and gas properties and prospects of Middle Bay. Middle
Bay also considered the possibility that such uncertainties could be
disadvantageous to Middle Bay and advantageous to the Partnership. See "Risk
Factors and Material Considerations."
- 42 -
<PAGE> 54
(j) The tax consequences to the Partners in connection with
the Exchange Offer and liquidation of the Partnership. Although the tax
consequences to some of the Partners may be unfavorable, Middle Bay believes
that the benefits of the transaction outweigh any such unfavorable
consequences, on balance, for all of the Partners. See "Material Federal Tax
Consequences."
(k) The benefits to Middle Bay of acquiring the Partnership's
properties. Middle Bay expects to benefit from the Exchange because the
Partnership's properties will add to Middle Bay's cash flow, increase Middle
Bay's oil and gas reserves and thereby increase its borrowing base for purposes
of securing Middle Bay's bank credit lines, thereby facilitating debt-financed
future acquisitions of oil and gas properties. Middle Bay also expects to
significantly reduce the general and administrative expenses of Enex associated
with management of the Partnership as a separate entity. See "Risk Factors and
Material Considerations Valuation Conflict of Interest; Benefits of Exchange to
Middle Bay."
In view of the wide variety of factors considered in connection with
its evaluation of the terms of the Exchange Offer, Middle Bay did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination.
MIDDLE BAY AND THE GENERAL PARTNER OF THE PARTNERSHIP HAVE DETERMINED
THAT THE EXCHANGE IS FAIR AND IN THE BEST INTERESTS OF THE PARTNERSHIP AND ITS
UNITHOLDERS AND RECOMMEND THAT THE UNITHOLDERS OF THE PARTNERSHIP TENDER THEIR
PARTNERSHIP INTERESTS AND CONSENT TO THE PROPOSAL.
ALTERNATIVES TO THE EXCHANGE
Middle Bay's analysis of the most probable results of continuing the
Partnership indicate that, while continuing the Partnership would avoid the
risks associated with the ownership of Series C Preferred in Middle Bay,
Investors will receive potentially greater values by participating in the
Exchange than the values they would derive from this alternative. Middle Bay
estimates that continuing the Partnership under market and operating conditions
prevailing in 1998 would likely generate decreasing annual distributions to
Investors of $3.22 per Unit in 1998, $1.33 in 1999, $1.07 in 2000 and $.81 in
2001. Middle Bay estimates that the remaining economic life of the Partnership
is six years, based upon projected production volumes and cash flows from the
Gruy Reserve Report.
Middle Bay also believes that, while liquidating the Partnership would
provide an immediate cash return and avoid the risks associated with owning
Middle Bay Series C Preferred, the Exchange will provide Investors with greater
values than they would likely receive in liquidation of the Partnership. Middle
Bay's liquidation analysis reflects an estimated liquidation value of
approximately $10,111,000, or $9.17 per Unit. For purposes of determining the
general and administrative costs to the Partnership during the liquidation
process, Middle Bay estimated that general and administrative expenses would
approximate the general and administrative expenses incurred by the Partnership
during the quarter ended June 30, 1998 on an annualized basis.
- 43 -
<PAGE> 55
The following tables summarize the results of Middle Bay's liquidation
analysis in comparison to the Exchange Value for the Partnership Units
determined by Middle Bay. The table also includes valuation data derived from
Middle Bay's analysis of continuing the Partnership. Middle Bay did not
undertake its continuation analysis for the purpose of valuing the Partnership,
but solely to illustrate the likelihood of decreasing distributions based on
production declines as projected in the Gruy Report and oil and gas prices at
September 30, 1998. However, because SEC disclosure standards for roll-up
transactions require a comparison of the value of the consideration offered in
the transaction with the value of the consideration estimated for each
alternative to the transaction, the tables also reflect the results of
extending Middle Bay's continuation analysis for the balance of the estimated
life of the Partnership's Proved Reserves, and discounting the projected stream
of distributions to present value at the same 10% discount rate used in Middle
Bay's liquidation analysis to account for the timing of cash flows as well as
production and concentration risks.
<TABLE>
<CAPTION>
Total Investor Value Per
Valuation Method Value(1) Unit
---------------- -------------- ---------
<S> <C> <C>
Exchange Value $11,730,000 $10.64
Liquidation value estimated by Middle Bay 10,111,000 9.17
Continuation analysis by Middle Bay,
assuming natural gas prices of $2.50
per Mcf and oil prices of $13.00 per
Bbl for 1998(2) 7,519,943 6.82
</TABLE>
(1) The Exchange Value and liquidation value attribute no value to the
General Partner's interest. The continuation analysis assumes
continued distributions to the General Partner pursuant to the terms
of the Partnership Agreement.
(2) The assumed natural gas and oil prices are the prices used for
preparation of the Partnership's reserve report dated September 23,
1998 and as of October 1, 1998, with escalation of prices and costs as
set forth in the report. The continuation analysis was calculated
based upon Middle Bay's estimate of the remaining economic life of the
Partnership, estimated to be six years.
The actual amount that Investors would receive if the Partnership
continued its operations would depend on production levels and various other
factors (prices, costs, etc.), which cannot be predicted with certainty. In
addition, the actual amount that Investors would receive under either of the
alternatives to the Exchange would depend on future oil and gas prices. To the
extent that future prices for those commodities are materially higher or lower
than the pricing assumptions made by the General Partner, those fluctuations
would likely have a similar effect on the operating results, distribution rates
and market value of the Partnership Units, largely negating the effect of price
changes on a comparison between the Exchange and either alternative of
continuing the Partnership or liquidating its assets. In addition, Middle Bay
believes that liquidating the Partnership would deprive Investors of the
opportunity to benefit from any future upturn in oil and gas prices.
- 44 -
<PAGE> 56
BENEFITS OF CONTINUED OPERATIONS
Continuing to operate the Partnership could benefit Investors by
avoiding many of the risks associated with owning Middle Bay Series C Preferred
or, assuming conversion, the underlying common stock. In addition, Middle Bay
does not pay cash dividends on its shares of common stock and does not
anticipate paying dividends in the foreseeable future. However, Middle Bay's
continuation analysis reflects a present value (using a 10% discount rate) that
is $3.82 per Unit (36%) below the Exchange Value. Accordingly, Middle Bay
believes that Investors are likely to receive less value if the Partnership
continues in its present form than they would receive by participating in the
Exchange. While this conclusion is supported by Middle Bay's analysis of
continuing the Partnership, there can be no assurance that the Exchange will be
more beneficial to Investors than continuing the Partnership.
PARTNERSHIP CONTINUATION ANALYSIS
<TABLE>
<CAPTION>
PV 10%
Year Total Cash Flow(1) Cash Flow Per Unit(2) Cash Flow Per Unit
---- ------------------ --------------------- ------------------
<S> <C> <C> <C>
1998 $ 483,846 $ .44 $ .43
1999 1,465,437 1.33 1.24
2000 1,175,749 1.07 .90
2001 893,994 .81 .62
2002 579,454 .53 .37
2003 381,741 .35 .22
2004 478,333 .43 .25
2005 5,862,112(3) 5.32 2.79
----------- ------ ------
Total(4) $11,320,666 $10.28 $ 6.82
</TABLE>
(1) Reflects total cash flow allocated to participants of the Partnership,
after allocation of cash flow to the General Partner's interest
pursuant to the terms of the Partnership Agreement. 1998 cash flow is
for October 1st through December 31st.
(2) Obtained by dividing the total cash flow by 1,102,631 Partnership
Units.
(3) Includes estimated net value of remaining assets.
(4) Middle Bay's continuation analysis estimates that the remaining
economic life of the Partnership is six years. This analysis assumes
that total revenues, production taxes and lease operating expenses
will be consistent with those assumptions set forth in the Gruy Report
dated September 23, 1998 and that annual general and administrative
expenses will be consistent with actual annualized general and
administrative expenses incurred by the Partnership for the three
months ended June 30, 1998.
- 45 -
<PAGE> 57
BENEFITS OF LIQUIDATION
If the Partnership liquidated its assets and completed a dissolution
upon the sale of its assets for cash, the Investors would benefit by receiving
an immediate cash return without continuing to be subject to the risks of
owning Middle Bay Series C Preferred and risks of participation in oil and gas
operations. In addition, if the Partnership were liquidated in a cash
transaction, Investors could reinvest the proceeds in similar or different
investments. For the reasons described herein, however, Middle Bay believes
that liquidating the Partnership would not provide Investors with greater
values than those they would receive in the Exchange. Although Middle Bay made
various assumptions that it believes to be reasonable in conducting the
liquidation analysis supporting this conclusion, there can be no assurance that
those assumptions would ultimately prove to be correct and that proceeds of a
cash sale would not exceed the value of the Series C Preferred issuable in the
Exchange.
Middle Bay's and Enex's decision to recommend approval of the Proposal
is supported by Gruy's liquidation analysis, reflecting an estimated
liquidation value of $10,111,000, or $9.17 per Unit and the fairness opinion
rendered by HW&G. Based on these factors, Middle Bay and Enex have concluded
that, while a sale of the Partnership's properties as a whole would provide an
immediate cash return to Investors, it would likely result in valuations by an
unaffiliated bidder or bidders below the Total Exchange Value, and further, any
cash received would likely be equal to or less than the liquidation value after
payment of transaction costs and costs associated with liquidation and
dissolution. Additionally, Middle Bay will assume all contingent and unknown
liabilities of the Partnership, as well as sole responsibility for payment of
all transaction costs associated with the Exchange Offer, allowing distribution
of consideration without deduction for such costs. Middle Bay believes it
unlikely that a third party would offer to purchase the Partnership's assets at
fair market value and also assume responsibility for payment of transaction
costs and assumption of all contingent and unknown liabilities.
PARTNERSHIP LIQUIDATION ANALYSIS
<TABLE>
<CAPTION>
<S> <C>
Estimated cash proceeds from sale of oil and gas properties $10,380,000
Working capital(1) 1,250,000
General and administrative expense(2) (1,000,000)
Transaction costs(3) (519,000)
-----------
Net Aggregate Liquidation Value $10,111,000
Liquidation Value Per Unit(4) $9.17
</TABLE>
(1) At September 30, 1998, the Partnership had estimated total assets of
$10,716,944 and estimated working capital of $1,250,000.
(2) Estimated expenses to the Partnership in preparing the Partnership
financial statements, tax returns, investor tax statements and similar
administrative matters. This estimate was determined based upon the
annualized actual expenses incurred by the Partnership for general and
administrative expense for the three months ended June 30, 1998.
- 46 -
<PAGE> 58
(3) Estimated legal, land, broker, accounting, printing and other costs
associated with the sale of the Partnership's oil and gas properties.
(4) Individual Unitholders' actual liquidation value per unit may vary
pursuant to the relationship the Unitholders' respective capital
accounts bear to their interests in the Partnership. Please see
Section 4.6 of the Limited Partnership Agreement.
Middle Bay's liquidation analysis assumed that a majority in Interest of the
Investors would approve the sale of all or substantially all of the
Partnership's assets, as required under the Partnership Agreement. Based on
this analysis, the General Partner concluded that Investors would benefit more
from the Exchange than a potential liquidation of the Partnership.
OTHER CONSIDERATIONS AS ALTERNATIVES
The General Partner and Middle Bay also considered whether assessing
the Unitholders for voluntary additional capital contributions and/or having
the Partnership borrow funds were feasible alternatives to provide capital for
further development activities. Both of the foregoing alternatives were
rejected as impractical and inconsistent with the business objectives of the
Partnership.
APPROVAL OF THE BOARD OF DIRECTORS OF MIDDLE BAY;
REASONS FOR THE APPROVAL
At a meeting held on October ___, 1998, the Board of Directors of
Middle Bay unanimously approved the Exchange Offer and the authorization and
issuance of Middle Bay Series C Preferred in connection with the Exchange. The
Alabama Corporation Law does not require that Middle Bay stockholders approve
the Exchange Offer or the issuance of Middle Bay Series C Preferred (or the
underlying common stock), and no such approval is being sought.
In reaching its conclusion to approve the Exchange Offer, the Board of
Directors of Middle Bay determined that the purchase of Partnership assets by
Middle Bay is consistent with and in furtherance of the long-term business
strategy of Middle Bay. In addition, the Board of Directors believes that the
Exchange Offer provides Investors in the Partnership the opportunity to benefit
from the continued growth of Middle Bay and consideration in excess of the
liquidation value or continuation value of the Partnership. In addition, the
Board believes that dissolution of the Partnership upon consummation of the
Exchange and adoption of the Proposal by the Partnership will allow Middle Bay
to focus its resources on the core assets and projects of Middle Bay and will
provide Middle Bay with the benefits of increasing its reserves and cash flow
and thereby increasing its borrowing base (reserves which qualify as security
for bank loans), which is expected to facilitate bank financing of future
acquisitions of oil and gas properties.
- 47 -
<PAGE> 59
FIDUCIARY DUTIES OF THE GENERAL PARTNER AND MIDDLE BAY
Middle Bay's and Enex's fiduciary duties to Unitholders include legal
responsibilities of loyalty, care and good faith. Neither Enex, as the General
Partner of the Partnership, nor Middle Bay, as the parent of Enex, may profit
by any conduct or transaction in contravention of their fiduciary obligations
to the Investors. Rights of action by or on behalf of the Investors for any
breach of these duties are provided under most state limited partnership or
other laws. Under New Jersey law, which is the choice of law provided in the
Partnership Agreement, a limited partner may bring action against a general
partner, upon a showing of the breach of its fiduciary duty, to recover his
capital contribution or to seek an accounting and dissolution of the
partnership. While a general partner would have the burden of dispelling all
doubts concerning its conduct, simple negligence or an error in judgment not
amounting to a breach of fiduciary duty would constitute a defense to the
limited partner's actions under New Jersey law. Middle Bay and Enex each
believes that it has complied with its fiduciary duties in the management of
the Partnership and in connection with the Exchange Offer.
Under New Jersey law, except as described below, if a nonconsenting
Investor believes that adoption of the Proposal or consummation of the Exchange
would constitute a breach of the General Partner's fiduciary duties, the
Investor could institute legal action against Middle Bay and/or Enex to enjoin
the Exchange or implementation of the Amendment contemplated by the Proposal or
to recover damages resulting from the consummation of the Exchange. In
appropriate circumstances, a limited partner may institute a class action
against its general partner on behalf of himself and the other similarly
situated limited partners or a derivative action against a general partner on
behalf of the partnership to recover damages for a breach of a general
partner's fiduciary duties. This is a developing area of the law, and Investors
who have questions concerning the General Partner's duties should consult with
their own legal counsel.
The Partnership Agreement provides that the General Partner and its
affiliates (including Middle Bay) will not be liable to the Partnership or the
Investors for errors of judgment or any acts or omissions that do not
constitute negligence or misconduct. In addition, the Partnership Agreement
provides generally that, to the extent permitted by law, the Partnership will
indemnify the General Partner and its affiliates providing services on behalf
of the Partnership against judgments and amounts paid in settlement, plus costs
and expenses (including reasonable attorneys' fees and expenses) actually and
reasonably incurred, if the indemnitee acted in good faith and in a manner
reasonably believed to be in, or not opposed to, the best interests of the
Partnership. In the opinion of the SEC, indemnification for liabilities arising
under the Securities Act is against public policy and, therefore,
unenforceable.
CONFLICTS OF INTEREST
Middle Bay, as controlling shareholder of the General Partner of the
Partnership, has an inherent conflict of interest in the determination of the
Exchange Value. Both the General Partner and Middle Bay owe a fiduciary duty to
Unitholders in the Partnership. In addition, Middle Bay and Enex owe a duty to
their respective stockholders, and Middle Bay owes a duty to the minority
shareholders of Enex. Middle Bay expects to benefit from the acquisition of the
Partnership's properties by its receipt of cash flow from the properties and
the addition to its borrowing base of the Proved Reserves of the Partnership
which is expected to facilitate bank financing of future acquisitions. While
Middle Bay believes that it has fulfilled its fiduciary obligations in the
determination of the Exchange Value which is supported, in part, by the Gruy
Report and the Fairness Opinion, no degree of objectivity or professional
competence can eliminate the inherent conflicts of interest. See "Reasons for
the Exchange Offer - Fiduciary Duties of Middle Bay and the General Partner"
and "Conflicts of Interest."
- 48 -
<PAGE> 60
CERTAIN TRANSACTIONS BETWEEN THE PARTNERSHIP, ENEX AND MIDDLE BAY
Enex, as General Partner and as a Unitholder of the Partnership, has
received $3,574,810 in total distributions from the Partnership since its
formation in 1997. These distributions included $3,403,404 attributable to
Enex's interest as a Unitholder and $171,406 attributable to its general
partnership interest. Middle Bay, as owner of 79.2% of Enex, benefits
indirectly from the Partnership's distributions to Enex. Since July 1997, Enex
has purchased for cash Units from various Unitholders at prices ranging from
$____ to $____ per Unit.
ACCESS TO INVESTOR LIST AND PARTNERSHIP RECORDS
Enex will provide free of charge to any Investor, upon written
request, a current alphabetized listing of all names and addresses of Investors
in the Partnership. Investors are afforded this right under the Partnership
Agreement and federal and state law. Investors also have the right under the
Partnership Agreement to inspect the books and records of the Partnership at
all reasonable times in the offices of the General Partner, which are the
offices of Middle Bay in Houston, Texas.
CONSENT PROCEDURES
WRITTEN CONSENT AND VOTE REQUIRED
Investors may tender their Partnership Units or vote against the
Proposal by properly completing and executing the Letter of Transmittal
accompanying this Prospectus and attached as Exhibit "C" in accordance with the
instructions contained therein and delivering it, together with any requisite
supporting documents indicated in the Letter of Transmittal, prior to the
Expiration Date to the General Partner at the following address:
Enex Resources Corporation
c/o Middle Bay Oil Company, Inc.
1221 Lamar Street, Suite 1020
Houston, Texas 77010
Telephone: (713) 759-6808
PARTNERSHIP UNITS WILL NOT BE VALIDLY TENDERED UNLESS THE LETTER OF TRANSMITTAL
HAS BEEN COMPLETELY AND FULLY EXECUTED IN ACCORDANCE WITH THE INSTRUCTIONS
THERETO AND ACCOMPANIED BY ALL OTHER REQUIRED DOCUMENTS IN FORM AND SUBSTANCE
SATISFACTORY TO MIDDLE BAY. All questions concerning the validity, form and
eligibility (including time of receipt) of tenders will be determined by Middle
Bay, whose determination will be final and binding.
- 49 -
<PAGE> 61
CONSENT TABULATION
All votes consenting to the Proposal and withholding consent, as
directed in the Letter of Transmittal submitted by Investors, will be tabulated
by the Exchange Agent, Bank of Oklahoma, N.A. (the "Bank"). The Bank has agreed
to make the tabulation available to Investors upon request to Middle Bay.
EXPIRATION OF EXCHANGE OFFER
The Exchange Offer will be held open for the greater of thirty (30)
days or twenty (20) business days from the date of this Prospectus and will
expire at 5:00 p.m. Central Time on the Expiration Date. The Expiration Date
will be ________, 1998, unless extended by Middle Bay for a period of up to
twenty (20) business days. Notice of extension of the Exchange Offer, if made,
will be given by mail to each Investor. An extension will be effective upon
mailing of notice.
AMOUNT TENDERED
Middle Bay will not accept tenders of less than all of an Investor's
Partnership Units.
REVOCABILITY OF TENDERS
Tenders of Partnership Units and consents to the Proposal may be
revoked at any time prior to the Expiration Date by sending notice of
revocation to Middle Bay at 1221 Lamar Street, Suite 1020, Houston, Texas
77010, Attention: Stephen W. Herod. The notice should identify the Investors,
include the number of Partnership Units for which he is revoking his tender and
indicate an intention to revoke a prior tender and withhold consent to the
Proposal. If this Prospectus is amended to reflect a material adverse
development, the Expiration Date will be extended, if required, to afford at
least twenty (20) business days for Investors to revoke their prior tender of
Partnership Units.
SOLICITATION OF LETTERS OF TRANSMITTAL
Middle Bay may enter into one or more agreements with participating
NASD broker/dealers ("Soliciting Dealer") to assist in the solicitation of
Letters of Transmittal for the Exchange Offer. Each Soliciting Dealer who
executes an agreement with Middle Bay will be entitled to receive a fee from
Middle Bay. Total fees paid to all Soliciting Dealers are not expected to
exceed $30,000 in the aggregate.
Middle Bay has agreed to indemnify Soliciting Dealers (if any) against
certain civil liabilities, including liabilities under the Securities Act. The
Soliciting Dealers may be deemed to be underwriters within the meaning of the
Securities Act.
- 50 -
<PAGE> 62
ACCEPTANCE OF TENDERS
On the Closing Date, subject to the satisfaction or waiver of the
conditions to the Exchange Offer, Middle Bay will accept all Partnership Units
properly tendered pursuant to the Exchange Offer. Middle Bay will then tender
these Partnership Units to Enex which will cause the assets of the Partnership,
subject to associated liabilities, to be withdrawn from the Partnership and
contributed to Middle Bay effective as of the Effective Date in exchange for
the Series C Preferred, which will be issued and delivered promptly after the
Closing Date.
On the Closing Date, Middle Bay will cause certificates representing
the Series C Preferred issuable in the Exchange to be registered in the name of
holders who have accepted the Exchange Offer. Middle Bay will also cause a
certificate representing the shares of Series C Preferred that will be issued
to participants upon liquidation of the Partnership to be issued in the name of
the Partnership, pending dissolution, liquidation and winding up of the
Partnership. Immediately thereafter, Enex will cause the shares of Series C
Preferred issued in the name of the Partnership to be transferred into
certificates representing Series C Preferred registered in the names of the
individual participants remaining in the Partnership following liquidation.
SPECIAL REQUIREMENTS FOR CERTAIN INVESTORS
Some of the Investors are entities, such as estates, trusts,
corporations, limited partnerships or general partnerships. With respect to a
Partnership Unit tendered by an Investor other than an individual, Middle Bay
may elect, at its option, to require that each Letter of Transmittal be
accompanied by evidence that the Investor has met all requirements of its
governing instrument, such as applicable partnership or joint venture
agreements, and is authorized to tender its Partnership Units under the laws of
the jurisdiction in which the entity was organized. With respect to most
trusts, including individual retirement accounts, Middle Bay expects to require
only that the named trustee (or authorized representative thereof) execute the
Letter of Transmittal.
REPRESENTATIONS AND COVENANTS
Each Investor represents in the Letter of Transmittal that he has, and
will have as of the Closing Date, the right and authority to transfer his
Partnership Unit and that his Partnership Unit is free and clear of all liens,
encumbrances and adverse claims. The Letter of Transmittal also contains a
covenant by the Investor to execute any additional documents and instruments
that may be reasonably required to more effectively transfer to and to vest in
Middle Bay the assets underlying the tendered Partnership Units and a power of
attorney to Middle Bay to permit Enex, as General Partner, to execute on the
Investor's behalf any additional documents necessary to consummate the
Exchange, including any documents on behalf of Investors that may be necessary
to withdraw the assets of the Partnership and contribute those assets to Middle
Bay.
VALIDITY OF TENDERS
All questions concerning the validity, form, eligibility (including
time of receipt) and acceptance of Partnership Units tendered will be
determined by Middle Bay, whose determination will be final and binding. The
interpretation by Middle Bay of the terms and conditions of the Exchange Offer
(including the instructions to the Letter of Transmittal) will also be final
and binding. Middle Bay reserves the right to waive any irregularities or
conditions regarding the manner of tender. Any irregularities in connection
with such tenders must be cured within such time as Middle Bay determines
unless waived by Middle Bay.
- 51 -
<PAGE> 63
Tenders will be deemed not to have been made until irregularities have
been cured or waived. Any Letter of Transmittal not properly completed and
executed will be returned by Middle Bay to the tendering Investor as soon as
practicable, unless the irregularities are cured or waived. Middle Bay is under
no duty to give notification of defects in tenders and will not incur liability
for failure to give such notification. Delivery of the Transmittal Letter is at
the risk of the Investor. A tender will be effective only when the Letter of
Transmittal is actually received by Middle Bay. To ensure receipt of the Letter
of Transmittal and all other required documents, if any, when sent by the U.S.
mail, Investors should use certified or registered mail, return receipt
requested.
PAYMENTS OF FEES AND EXPENSES
Fees and expenses incurred in connection with the Exchange Offer will
be paid by Middle Bay, whether or not the Proposal is accepted. Fees and
expenses incident to the Exchange Offer are estimated to be approximately
$_______, all of which will be funded from Middle Bay's working capital. The
estimated fees and expenses for the Exchange Offer are itemized below:
<TABLE>
<S> <C> <C>
SEC registration fee ......................................... $ 1,684
NASD filing fee...............................................
NASDAQ listing fees...........................................
Soliciting Agent fees......................................... 30,000
Legal fees and expenses.......................................
Blue Sky expenses.............................................
Printing costs................................................ 17,000
Engineering fees..............................................
Accounting fees...............................................
Fairness Opinion.............................................. 40,000
Miscellaneous.................................................
Total................................................
</TABLE>
COMPLIANCE WITH TENDER OFFER PRACTICES
In conducting the Exchange Offer, Middle Bay will comply with the
provisions of Rule 14e-1 under the Exchange Act relating to the solicitation of
tenders and the payment of consideration in a tender offer.
MATERIAL FEDERAL TAX CONSEQUENCES
The following tax discussion summarizes certain federal income tax
consequences of the Exchange. This summary is the opinion of Thrasher, Whitley,
Hampton & Morgan, counsel to Middle Bay in connection with the Exchange, whose
formal opinion (the "Tax Opinion") is included as an Exhibit to the
Registration Statement of which this Prospectus is a part. The following is
intended to provide only a general summary and does not include a complete
analysis of the consequences that may vary with or are contingent upon
individual
- 52 -
<PAGE> 64
circumstances, such as a taxpayer who is subject to special provisions of the
Internal Revenue Code. This discussion and opinion does not address the federal
income tax treatment of other transactions related to the Exchange, any aspect
of state, local or foreign tax laws or any federal laws other than those
pertaining to income tax.
None of the parties have requested a ruling from the Internal Revenue
Service with respect to the federal income tax consequences of the Exchange. No
assurance can be given that future legislation, regulations, administrative
pronouncements or court decisions will not significantly change the law and
materially affect the conclusions expressed herein. Any such change, even
though made after the consummation of the Exchange, could be applied
retroactively.
Unitholders may obtain a copy of the Tax Opinion by sending a written
request to Middle Bay Oil Company, Inc., 1221 Lamar Street, Suite 1020,
Houston, Texas 77010, attention: Frank C. Turner, II.
TAX CONSEQUENCES OF THE EXCHANGE
Upon the exchange of Partnership Units for Series C Preferred,
Investors must recognize gain or loss equal to the difference between the fair
market value of the Series C Preferred received by them and bases in the
Partnership Units exchanged therefor.
The Internal Revenue Service might argue that the transaction
constitutes a transfer of assets of the Partnership to Middle Bay for Series C
Preferred, with the Series C Preferred then distributed to Investors not
participating in the Exchange in liquidation of their interests in the
Partnership. Under such a characterization of the transaction, the Partnership
would recognize gain or loss on the disposition of the assets which would be
allocated to those Investors. Such characterization could affect the amount of
gain or loss recognized by them. However, courts evaluating the transfer of all
of the assets of a partnership, followed by a termination of the business of
the partnership, have held, according to a rule known as the "sale of a going
business doctrine," that such transactions will be characterized as a transfer
of partnership interests in exchange for the assets received rather than a
transfer by the partnership of assets and subsequent liquidation. According to
that doctrine, the treatment afforded Unitholders not participating in the
Exchange should not differ from the tax treatment realized by Investors who
agree to exchange their Partnership Units for Series C Preferred. The sale of a
going business doctrine has been implicitly rejected by the Internal Revenue
Service, however, and the doctrine has not been affirmed by any recent court
decision.
Assuming the Unitholder has held his Interest as a capital asset for
more than one year and assuming his Interest has not been held for sale in the
ordinary course of the Unitholder's trade or business, any gain or loss
realized upon the transfer of Partnership Units will be taxed as long-term
capital gain or loss, except to the extent that the consideration received is
attributable to his allocable share of inventory items and unrealized
receivables (including depreciation recapture and excess intangible drilling
and development costs) of the Partnership. The portion of any gain attributable
to these items will be taxed to the Unitholder as ordinary income. In addition,
in the event of a recharacterization of the transaction as a transfer of
assets, additional ordinary income could be recognized by the Partnership which
would be allocable to Unitholders.
- 53 -
<PAGE> 65
REALIZATION OF SUSPENDED PASSIVE LOSSES
Upon disposition of Partnership Units, Unitholders will have
completely disposed of their Interests in the Partnership. Any Unitholder who
has any suspended passive losses resulting from the ownership of Partnership
Units will be allowed to recognize those suspended passive losses upon
consummation of the Exchange, assuming the Partnership Units constitute the
Unitholder's entire interest in an activity for purposes of the passive loss
rules.
BASIS IN STOCK
Upon consummation of the Exchange, the basis of the Series C Preferred
received by Investors will generally be equal to the fair market value of such
securities as of the date of consummation of the Exchange. In the case of a
Unitholder not participating in the Exchange, this assumes that the "sale of a
going business doctrine" (explained above) applies to the transaction;
otherwise, such basis will be determined, in the case of such a Unitholder, by
reference to his adjusted basis in his Partnership Units.
THE PRECEDING DISCUSSION AND OPINION IS INTENDED ONLY AS A SUMMARY OF
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE AND DOES NOT PURPORT
TO BE A COMPLETE ANALYSIS OR DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT
THERETO. THUS, INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES TO THEM OF THE EXCHANGE, INCLUDING TAX RETURN
REPORTING REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL
AND OTHER APPLICABLE TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN THE TAX
LAWS.
- 54 -
<PAGE> 66
SELECTED FINANCIAL DATA - MIDDLE BAY
MIDDLE BAY SELECTED HISTORICAL FINANCIAL DATA
The following selected consolidated financial data for Middle Bay as
of and for each of the years ended December 31, 1996 and 1997 are derived from
Middle Bay's audited consolidated financial statements. The selected
consolidated financial data for the six months ended June 30, 1998 and 1997 are
derived from Middle Bay's unaudited financial statements. In the opinion of
management, such unaudited financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary for a fair
presentation of the financial condition and results of operations as of and for
the periods presented. Operating results for the six months ended June 30, 1998
are not necessarily indicative of the results that may be expected for the
entire fiscal year ending December 31, 1998. The selected consolidated
financial data below should be read in conjunction with Middle Bay's
consolidated financial statements and related notes thereto, Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere herein or incorporated by reference herein.
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
Years Ended December 31, June 30,
------------------------ --------
1996 1997 1997 1998
---- ---- ---- ----
Operating Data (in thousands, except per-share amounts)
<S> <C> <C> <C> <C>
Oil and gas sales $ 4,475 $ 10,213 $ 3,694 $ 7,117
Delay rental and lease bonus income -- 975 -- 197
Other 412 245 59 251
------- -------- ------- --------
Total Revenue 4,887 11,433 3,753 7,565
Costs and Expenses
Operating expenses, including production
taxes 1,516 3,849 1,316 3,605
Exploration costs -- 223 115 788
Impairment expense 277 21,148 -- --
Dryhole costs 429 1,119 236 307
Depletion, depreciation and amortization 1,185 4,567 1,055 3,025
Interest 505 671 260 813
Stock compensation expense -- 202 -- 68
General and administrative 662 2,361 954 2,260
Other 32 317 -- --
------- -------- ------- --------
Total Expenses 4,606 34,457 3,936 10,866
Income (loss) before income taxes 281 (23,024) (183) (3,301)
Minority interest -- -- -- (148)
Income tax expense (benefit) 75 (7,445) -- (1,072)
------- -------- ------ --------
Net income (loss) 206 (15,579) (183) (2,081)
Dividends to preferred stockholders -- 605 204 68
------- -------- ------ --------
Net income (loss) available to stockholders $ 206 $(16,184) $ (387) $ (2,149)
======= ======== ======= ========
Net income (loss) per common share
Basic $ 0.15 $ (4.76) $ (0.17) $ (0.28)
Diluted 0.14 (4.76) (0.17) (0.28)
Total assets 13,185 37,253 52,379 68,243
Long-term debt 5,158 9,715 7,842 26,628
Redeemable common stock 421 -- -- --
Dividends per share -- -- -- --
</TABLE>
- 55 -
<PAGE> 67
<TABLE>
<CAPTION>
(Unaudited)
At December 31, At June 30, 1998
----------------------- ----------------
1996 1997 Historical
Balance Sheet Data ------- ------ ----------------
(in thousands, except per-share amounts)
<S> <C> <C> <C>
Working capital 786 1,313 401
Total assets 13,185 37,253 68,243
Long-term obligations, net of current
portion 5,158 9,715 26,628
Stockholders' equity 6,037 19,866 23,109
</TABLE>
- 56 -
<PAGE> 68
MANAGEMENT'S DISCUSSION AND ANALYSIS OF MIDDLE BAY'S
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Middle
Bay's Financial Statements and Notes thereto set forth herein.
RESULTS OF OPERATIONS -- 1997
The factors that most significantly affect Middle Bay's results of
operations are (i) the sales price of crude oil and natural gas, (ii) the level
of production volumes, (iii) the level of lease operating expenses, and (iv) the
level of interest rates. Sales of production and level of borrowing are
significantly impacted by Middle Bay's ability to maintain or increase its
production from existing oil and gas properties or through its exploration and
development activities. Sales prices received by Middle Bay for oil and gas have
fluctuated significantly from period to period. The fluctuations in oil prices
during these periods reflect market uncertainty regarding the inability of OPEC
to control the production of its member countries, production from Iraq, as well
as concerns related to the global supply and demand for crude oil. Gas prices
received by Middle Bay fluctuate generally with changes in the spot market price
for gas. Relatively modest changes in either oil or gas prices significantly
impact Middle Bay's results of operations and cash flow and could significantly
impact Middle Bay's borrowing capacity.
The table below details the changes in oil and gas revenues, excluding
plant and other revenues, caused by price and volume changes for the years
ending December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
Oil Revenues
Change due to volume $ 2,942,138 $ 32,436 $ 576,865
Change due to price (478,122) 437,285 102,558
Total change 2,464,016 469,271 679,423
Gas Revenues
Change due to volume $ 2,161,383 $149,921 $ 277,755
Change due to price 201,483 708,386 (182,391)
Total change 2,362,866 858,307 95,364
</TABLE>
FISCAL 1997
Total revenues for the twelve months ended December 31, 1997, of
$11,433,000, were $6,546,000 higher than the same period in 1996. The increase
in total revenues was due primarily to higher oil and gas revenues of
$4,827,000, consisting primarily of a $2,464,000 increase in oil revenues and a
$2,363,000 increase in gas revenues. Also contributing to the revenue increase
was $920,000 in revenue from gas processing at the gas plant located at the
Spivey Field and $975,000 in lease bonus and delay rental income on the fee
mineral acreage in Louisiana. The gas processing plant was acquired in the
February 28, 1997 Bison
- 57 -
<PAGE> 69
Merger. The increase in oil and gas revenues from 1996 to 1997 was primarily the
result of increases in production which resulted from the Bison and Shore
Mergers. Production from the Bison and Shore Mergers is included from March 1
and July 1, 1997, respectively. Production of oil and gas for the twelve months
ended December 31, 1997, increased 133% and 96%, respectively, over the
comparable period. During the twelve-month period ended December 31, 1997,
Middle Bay sold 254,000 barrels of oil and 1,929,000 Mcf of gas, as compared to
109,000 barrels of oil and 983,000 Mcf of gas for the comparable period. Oil
production for 1997 was 145,000 barrels higher due primarily to a 58,000 barrel
increase from the Bison Merger and a 76,000 barrel increase from the Shore
Merger. Gas production in 1997 was 946,000 Mcf higher due primarily to a 521,000
Mcf increase from the Bison Merger, a 335,000 Mcf increase from the Shore Merger
and a 188,000 Mcf increase from the Riceville Acquisition. The average price
received on the gas sold in 1997 of $2.39 per Mcf was slightly higher than the
average $2.28 per Mcf received in the comparable period. Oil prices in 1997 of
$18.38 per barrel were 9% lower than the average of $20.26 per barrel received
in the comparable period.
Middle Bay received approximately $975,000 in lease bonus and delay
rental income on the fee mineral acreage acquired in the Shore Merger over the
six-month period ending December 31, 1997.
The increase in total revenues of $6,546,000 was less than the increase
in total expenses, before income taxes, of $29,851,000. The principal reasons
for the increase in the overall level of expenses are (1) increased oil and gas
property impairment charge of $20,870,000; (2) increased lease operating and
depletion expenses of $5,715,000 from properties acquired in the Bison and Shore
Mergers which are included with Middle Bay's expenses from March 1 and July 1,
respectively; and (3) increased G&A expenses of $1,699,000 due to increased
number of employees from the Bison and Shore Mergers and higher overall
administrative expenses due to the increased level of activity.
In the fourth quarter of 1997, Middle Bay charged to impairment expense
$21,148,000 versus $278,000 in the comparable period. The impairment expense was
computed applying the guidelines of FAS #121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." This statement
requires that long-lived assets be reviewed for impairment when events or
changes in circumstances indicate that the carrying value of such assets may not
be recoverable. This review consists of a comparison of the carrying value of
the asset with the asset's expected future undiscounted cash flows without
interest costs. Expected undiscounted future cash flow is defined as "the future
cash inflows expected to be generated by an asset less the future cash outflows
expected to be necessary to obtain those inflows (undiscounted and without
interest charges)." The independent oil and gas engineers identified under
"Experts" determine the expected future undiscounted cash flows. To determine
the expected future undiscounted cash flows of each property, the engineers
estimated each property's oil and gas reserves, relied on certain information
supplied by Middle Bay regarding the oil and gas reserves, applied certain
assumptions regarding price and cost escalations, and applied certain discount
factors for risk, location, type of ownership interest, category of reserves,
operational characteristics and other factors. Estimates of expected future
undiscounted cash flows are to represent management's best estimate based on
reasonable and supportable assumptions and projections. If the expected future
undiscounted cash flows exceed the carrying value of the asset, no impairment is
recognized. If the carrying value of the asset exceeds the expected future
undiscounted cash flows, impairment exists and is measured by the excess of the
carrying value over the estimated fair value of the asset. Fair value is defined
in the statement as the "amount at which the asset could be bought or sold in a
current transaction between willing parties."
-58-
<PAGE> 70
The impairment expense in the current period of $21,148,000 was
primarily attributable to impairments on three fields--the Esther Field, Spivey
Field and Wellman Field--amounting to $8,394,000, $6,127,000 and $2,257,000,
respectively. The Esther and Wellman Fields were acquired in the Shore Merger,
and the Spivey Field was acquired in the Bison Merger. The impairment on the
Esther Field in Vermilion Parish, Louisiana was due primarily to a change in the
category of reserves from Proved Undeveloped to Probable Undeveloped and changes
in the economics of the development of the reserves. The category of the
reserves was changed due to an abandoned sidetrack attempt in February, 1998 by
the operator on the Proved Undeveloped Reserves. The impairment on the Spivey
Field was due primarily to a decrease in the level of oil prices and changes in
the economics of the Proved Undeveloped Reserves due to information obtained
from the wells drilled in 1997. The impairment on the Wellman Field in Terry
County, Texas was due primarily to decreases in oil prices. Since July 1, 1997,
the posted price of WTI crude oil has fallen from approximately $18.00 per
barrel to $15.00 per barrel at December 31, 1997 or 17%. The total oil
equivalent reserves of the Wellman Field are 95% oil. The remaining impairment
expense of approximately $4,370,000 is attributable to several fields. The
principal reasons for the impairment on these fields are the decrease in oil
prices and the decrease or cessation of oil and gas production.
Lease operating expenses of $3,849,000 increased by $2,333,000. The
increase was due primarily to the Bison and Shore Mergers which increased lease
operating expenses $1,067,000 and $915,000, respectively. Depletion expense of
$4,567,000 increased by $3,382,000. Depletion increased primarily due to the
Bison and Shore Mergers which increased depletion by $1,279,000 and $1,270,000,
respectively. Interest expense of $671,000 increased by $166,000 due to a higher
loan balance. Dry-hole expense of $1,119,000 increased by $690,000 due primarily
to abandonment costs on three unsuccessful Exploratory Wells drilled in
Louisiana--the Shore Oil Company #1, the Sabine #1 and the Middle Bay Oil
Company #1-- with dry-hole costs of $311,000, $177,000 and $168,000,
respectively. General and administrative expense of $2,361,000 increased by
$1,699,000, due primarily to higher salary expense of $724,000, higher
professional fees of $347,000, higher office expenses of $128,000, and higher
IRA/SEP/Other Bonus expenses of $123,000. The remaining increase in general and
administrative expenses was over several expense categories and was due
primarily to an increase in the overall level of activity at Middle Bay as a
result of the Bison and Shore Mergers. The increase in salary expense is due to
increases in salaries of existing employees and salaries associated with
employees added in the Bison and Shore Mergers. At the time of the Bison Merger,
seven employees occupied the Wichita, Kansas office. Effective August 1, 1997,
only four employees will be occupying the Wichita, Kansas office--the President
of Bison, an engineer, geologist and secretary. The President of Shore, an
engineer and a secretary were added in the Shore Merger. In addition, Middle Bay
hired a land manager in July to manage Middle Bay's land and mineral records and
an accounting supervisor in October to assist with the increased accounting
workload. Stock compensation expense of $202,000 increased by $202,000 due to
the vesting of 50% of the restricted stock granted to certain Company employees
in February, 1997. The remaining 50% will fully vest on June 30, 1998. Other
expenses of $317,000 increased $285,000 over the comparable period. The primary
reason for the increase was expenses associated with the Bison and Shore
Mergers.
- 59 -
<PAGE> 71
Middle Bay reported an operating loss of $23,024,000 for the year ended
December 31, 1997, as compared to an operating profit of $280,000 in the
comparable period.
Middle Bay reported a deferred tax benefit of $7,451,249 for the year
ended 1997 versus a deferred tax expense of $70,000 in the comparable period.
The primary reason for the deferred tax benefit in 1997 was the oil and gas
reserve impairment on the properties acquired in the Bison and Shore Mergers in
1997 and the NPC Merger in 1996. These three mergers were tax-free mergers, and
the tax basis of the oil and gas properties acquired were carried over on Middle
Bay's books at the merger dates. For accounting purposes, the three mergers were
purchases and the oil and gas properties were recorded on Middle Bay's books at
fair market value on the merger dates. The fair market value was much higher
than the carryover tax basis and a deferred tax liability at the prevailing tax
rate was recorded for the difference. The total deferred tax liability that was
recorded on Middle Bay's books for the Bison, Shore and NPC Mergers was
approximately $12 million. When the impairment reduced the carrying amount of
the oil and gas properties for accounting purposes but not for tax purposes, the
difference between the accounting and tax basis of the properties was reduced
and the deferred tax liability was reduced accordingly, resulting in a deferred
tax benefit.
Middle Bay reported a net loss of $15,579,340 versus net income of
$205,500 for the comparable period. Middle Bay paid preferred dividends of
$605,000 in the current period and reported a net loss to common stockholders of
$16,184,052 versus net income available to common stockholders of $205,000 for
the comparable period. No preferred dividends were paid in 1996.
FISCAL 1996
Total revenues for the twelve months ended December 31, 1996, of
$4,886,000, were $1,348,000 higher than the comparable period. The increase in
total revenues was due primarily to higher oil and gas revenues of $1,236,000,
consisting primarily of a $469,000 increase in oil revenues and a $858,000
increase in gas revenues. Total revenues also increased due to higher other
income of $199,000, due primarily to a gas contract settlement of $263,000. The
increase in oil and gas revenues from 1996 to 1995 was primarily the result of
higher oil and gas prices. Production of oil and gas for the twelve months ended
December 31, 1996, increased 1% and 7%, respectively, over the comparable
period. During the twelve-month period ended December 31, 1996, Middle Bay sold
109,000 barrels of oil and 983,000 Mcf of gas, as compared to 107,000 barrels of
oil and 917,000 Mcf of gas for the comparable period. Oil production for 1996
was 1,600 barrels higher due to a 4,300 barrel increase from the successful
wells in the Brigham Agreement, a 500 barrel increase in existing properties,
and a decrease of 3,200 barrels from properties sold in 1996. Gas production in
1996 was 66,000 Mcf higher due to a 25,000 Mcf increase from the successful
wells in the Brigham Agreement and a 78,000 Mcf increase in existing properties
offset by a decrease of 37,000 Mcf from properties sold in 1996. The price
received on the gas sold in 1996 of $2.28 per Mcf was higher than the $1.52 per
Mcf received in the comparable period. Oil prices in 1996 of $20.26 per barrel
were 25% higher than the $16.17 per barrel received in the comparable period.
The increase in total revenues of $1,348,000 was more than the increase
in total expenses of $646,000. Increases in dry-hole costs and depreciation and
depletion expense accounted for approximately 91% of the total expense increase.
- 60 -
<PAGE> 72
Lease operating expenses of $1,516,000 increased by $79,000 as a result
of higher expenses on existing properties of $138,000 and expenses on successful
wells in the Brigham Agreement of $4,300 offset by reductions due to properties
sold in 1996 of $63,000. Interest expense of $505,000 decreased by $15,000 due
to lower interest rates and payments on principal in 1996. Dry-hole expense
increased by $346,000 due primarily to abandonment costs of $421,000 associated
with the unsuccessful wells drilled in the Brigham Agreement. Depletion expense
of $1,397,000 increased by $256,000. Regular depletion of $1,119,000 increased
by $134,000 due primarily to higher depletion on existing properties. Write-offs
of proven properties in accordance with SFAS #121 of $277,000 increased by
$121,000. Of the total writedown, 75% is from three single well fields in
Louisiana. One of the fields was the Lake Decade Field which was a major
property in 1995. It contributed $91,000 to cash flow in 1996 before it ceased
producing in December 1996, resulting in an impairment expense of $59,000. The
other two fields, which produced very little in 1996, were minor properties
contributing less than $20,000 to cash flow in 1995, and producing impairment
losses of $95,000 and $55,000. The remaining impairment expense resulted from
several properties, none of which were significant properties in terms of
discounted present value and were primarily mature, small properties that did
not contribute significantly to Middle Bay's cash flow in 1996 and 1995.
Depreciation expense of $60,000 decreased $15,000 due to lower depreciation on
lease and well equipment and corporate office furniture and fixtures which are
depreciated on an accelerated method which declines over the useful life of the
asset. General and administrative expenses decreased by $3,900, due primarily to
Middle Bay's lower 1996 SEP/IRA and 1% NPI contributions of $12,000 compared to
the $60,000 in contributions in 1995, lower accounting expenses of $14,000 and
lower miscellaneous expenses of $18,000 which were partially offset by higher
travel and entertainment expenses of $47,000 and higher legal expenses of
$12,000.
Middle Bay reported an operating profit of $280,000 for the year ended
December 31, 1996 as compared to an operating loss of $421,000 in 1995. If the
1996 nonrecurring credits of $303,000 consisting of the gas contract settlement
of $263,000 and lease operating expense credit of $40,000, were offset against
the 1995 nonrecurring expenses of $62,000, the change in operating profit would
have decreased to $336,000.
Middle Bay reported net income of $205,000 for the year ended December
31, 1996, versus a net loss of $331,000 for the comparable period.
SIX MONTHS ENDED JUNE 30, 1997 AND 1998
For the current period, revenues and expenses attributable to the Enex
Acquisition are included for the period April through June; those attributable
to the Service Drilling Acquisition are included for the months of May and June.
For the prior period, the revenues and expenses attributable to the Bison Merger
are included for the period March through June.
Total revenues for the current period of $7,565,000 were $3,812,000
higher than the comparable period. The increase in total revenues was due
principally to higher oil and gas revenues of $3,423,000. During the current
period, the Company collected $197,000 in lease bonus and rental income on the
mineral acreage acquired in the Shore Merger. Other revenues in the current
period increased $187,000.
- 61 -
<PAGE> 73
The increase in oil and gas revenues consisted primarily of a
$1,342,000 increase in oil revenues and a $2,001,000 increase in gas revenues.
The increase in oil and gas revenues was the result of higher oil and gas
production. Production of oil increased 174%, and production of gas increased
149% over the comparable period. The oil production increase of 168,000 barrels
and the gas production increase of 1,006,000 Mcf were due primarily to the Bison
and Shore Mergers, the Riceville acquisition which closed in 1997 and the Enex
and Service acquisitions which closed in 1998. During the current period, the
Company sold 264,000 barrels of oil and 1,681,000 Mcf of gas, as compared to
97,000 barrels and 676,000 Mcf for the comparable period. The average price
received on the gas sold in the current period of $2.13 per Mcf was 9% lower
than the $2.35 per Mcf received in the comparable period. The average price
received on the oil sold in 1998 of $12.26 per barrel was 38% lower than the
$19.64 per barrel received in the comparable period. A reclassification of
12,000 barrels and $176,000 in oil revenues was made in the prior period. The
revenues were previously recorded in gas plant revenues with no volumes
associated with the revenues.
Total expenses increased $6,930,000 over the comparable period. Due to
the growth of the Company over the last twelve months, all categories of
expenses increased.
Lease operating expenses increased $2,288,000. The increase was due
principally to the additional expenses on the properties acquired in the Bison
and Shore Mergers which closed in 1997 and the Enex and Service acquisitions
which closed in 1998.
Geological and geophysical expenses ("G&G expenses") increased by
$673,000. In the current period, the Company spent approximately $740,000 in G&G
expenses on the Hawkins Ranch Prospect versus approximately $111,000 on the
Reflection Ridge Prospect in the comparable period.
Depletion and depreciation expense increased $1,970,000. Depletion was
higher due to depletion on properties acquired in the Bison and Shore Mergers
and the Riceville acquisition, which closed in 1997, and the Enex and Service
acquisitions, which closed in 1998.
During the current period, dryhole expenses increased by $72,000. In
the current period, the dryhole expense of $307,000 consisted principally of
$199,000 for the dryhole on the South Highbaugh Prospect and additional dryhole
expenses of $102,000 on two dryholes on the Reflection Ridge Prospect. The net
dryhole expense on the Middle Bay Oil #1 for the current period was a credit of
$36,000 because of the actual dryhole cost being less than the estimated dryhole
cost. The Reflection Ridge wells and the Middle Bay Oil Co. #1 were drilled and
abandoned in the fourth quarter of 1997. Dryhole expenses in the comparable
period consisted principally of costs through the Brigham Agreement.
Interest expense increased $553,000, due primarily to a higher loan
balance.
Stock compensation expense increased $67,000 due to the vesting of the
restricted stock granted to certain Company employees in February, 1997.
- 62 -
<PAGE> 74
General and administrative expenses ("G&A") increased $1,306,000. The
increase in G&A consists primarily of a $393,000 increase in salaries, $132,000
in performance bonuses for the previous year, an increase of $305,000 in
engineering, accounting and legal expenses and an increase in rent expense of
$89,000 and office expense of $99,000. The increase in salary expense was due to
increases in salaries of existing employees, salaries of new employees and
salaries associated with employees added in the Bison and Shore Mergers. For the
current period, the Company had twenty full-time executive and clerical
employees. Eight employees were added through the Bison and Shore Mergers, and
the Company hired six employees and one resigned. The increase in rent is due to
the Company previously owning its office in Mobile, Alabama versus renting
office space since the Company's move to Houston in November, 1997. The
increases in other G&A expenses are due to the increase in the general activity
of the Company's business.
The Company reported an operating loss before minority interest of
$3,301,000 for current period versus an operating loss of $183,000 for the
comparable period. Due to the Enex acquisition, the Company records a minority
interest on its income statement to remove the net income or loss attributable
to the minority interest holders of Enex. In the current period, the minority
interest reduced the operating loss by $149,000.
The Company reported a deferred income tax benefit of $1,072,000 in the
current period. No deferred taxes were recorded in the comparable period.
The Company reported a net loss of $2,081,000 for the current period
versus a net loss of $183,000 for the comparable period. After considering the
preferred stock dividend requirement of $68,000 in the current period versus
$204,000 in the comparable period, the Company reported a net loss available to
common stockholders in the current and comparable periods of $2,149,000 and
$387,000, respectively.
EFFECTS OF OIL AND GAS PRICE FLUCTUATIONS
Fluctuations in the price of crude oil and natural gas significantly
affect Middle Bay's operations and the value of its assets. As a result of the
instability and volatility of crude oil and natural gas prices, financial
institutions have become more selective in the energy lending area and have
reduced the percentage of existing reserves that may qualify for the borrowing
base to support energy loans.
Middle Bay's principal source of cash flow is the production and sale
of its crude oil and natural gas reserves which are depleting assets. Cash flow
from oil and gas production sales depends upon the quantity of production and
the price obtained for that production. An increase in prices permits Middle Bay
to finance its operations to a greater extent with internally-generated funds,
allow Middle Bay to obtain equity financing more easily and lessens the
difficulty of attracting financing alternatives available to Middle Bay from
industry partners and nonindustry investors. However, price increases heighten
the competition for Leases and Prospects, increase the costs of exploration and
development activities and increase the risks associated with the purchase of
Producing Properties.
A decline in oil and gas prices (i) reduces the cash flow internally
generated by Middle Bay, which in turn reduces the funds available for servicing
debt and exploring for and replacing oil and gas reserves, (ii) increases the
difficulty of obtaining equity financing, (iii) reduces the number of Leases and
Prospects available to Middle Bay on reasonable economic terms and (iv)
increases the difficulty of attracting financing alternatives available to
Middle Bay from industry partners and nonindustry investors. However, price
declines reduce the
- 63 -
<PAGE> 75
competition for Leases and Prospects and correspondingly reduce the prices paid
for Leases and Prospects. Furthermore, exploration and production costs
generally decline, although the decline may not be at the same rate of decline
of oil and gas prices.
Since September, 1997, the price of oil has declined dramatically. The
posted price of WTI crude oil has declined from a high of approximately $20.00
per barrel in October, 1997 to lows in June, 1998 of approximately $9.00 per
barrel. As of September 30, 1998, the posted price of WTI was approximately
$13.50. The average posted price of WTI crude oil for the year 1997 was
approximately $18 per barrel. As of September 30, 1998, approximately 42% of
Middle Bay's proved developed producing oil and gas reserves, on a BOE basis,
are oil. If oil prices remain at or near the September, 1998 levels, Middle
Bay's revenue and cash flow will decrease relative to the year ended 1997. Gas
prices peaked in November, 1997 at approximately $3.80 Mcf, but have declined to
levels approximating $2.25 Mcf as of September 30, 1998.
SEASONALITY
The results of operations of Middle Bay are somewhat seasonal due to
seasonal fluctuations in the price for natural gas. Generally, natural gas
prices are higher in the first and fourth quarter of the year due to colder
winter weather and resulting higher demand for natural gas during these months.
Due to these seasonal fluctuations, results of operations for individual
quarterly periods may not be indicative of results on an annual basis.
INFLATION AND CHANGING PRICES
Inflation principally affects the costs required to drill, complete and
operate oil and gas wells. In recent years, inflation has had a minimal effect
on the operations of Middle Bay. Costs have generally declined over the near
future due to the decrease in drilling activity in the United States. Unless
increasing oil and gas prices spur large increases in industry activities,
management believes costs will remain relatively stable over the next year.
CAPITAL RESOURCES AND LIQUIDITY -- FISCAL 1997 AND FISCAL 1996
Cash flow from operations before working capital changes of $2,925,000
increased $1,225,000 over the comparable period. This increase was due to a
$3,184,000 increase in oil and gas cash flow, an increase of $554,000 in other
income offset by increases in general and administrative costs of $1,654,000,
dry-hole costs of $691,000, interest expense of $166,000 and $1,000 in current
income taxes. Increased oil and gas operations cash flow before working capital
changes was principally the result of increases in oil and gas production. The
other income increase was due primarily to lease bonus and delay rental income
on the minerals acquired in the Shore Merger.
Cash flow from operating activities for the year ending December 31,
1997, of $2,582,000 increased $1,193,000 over the comparable period. Changes in
working capital reduced cash flow by $32,000 over the comparable period.
Differences in the amount and timing of accrual and payment of payables and the
accrual and receipt of revenues account for the changes in working capital.
- 64 -
<PAGE> 76
Additions to oil and gas properties were higher than the comparable
period due to the Bison and Shore Mergers and increased acquisitions and
drilling in the current period. The increase in the amount of cash used for debt
payments was due primarily to the $2,105,000 refinancing of the term note
assumed in the Shore Merger and the $385,000 of payments and refinancing on the
note assumed in the NPC Merger. No principal payments have been required over
the period April 1, 1996 to December 31, 1997 on Middle Bay's $6 million, $15
million and $50 million convertible loans. The increase in the proceeds from
debt issued was due to the refinancing of the notes assumed in the Shore and NPC
Mergers, $3,000,000 issued in the Riceville Acquisition and the financing of the
leasehold and seismic costs in the amount of $385,000 associated with the
Reflection Ridge Prospect. The increase in proceeds from issuance of preferred
stock was due to the preferred stock issued to finance portions of the Bison and
Shore Mergers.
Middle Bay's operating activities provided net cash of $2,582,000 for
the year ending December 31, 1997. During this period, net cash from operations
and cash on hand was used principally for exploratory and developmental drilling
of $2,004,000, workovers of $431,000, exploration prospects of $415,000 and
proved property acquisitions of $921,000. Debt proceeds were used to finance
$3,000,000 of proved property acquisition and $285,000 of prospects. Common
stock was issued for $260,000 of proved property acquisitions, excluding
mergers. Of the $2,004,000 spent on exploratory and developmental drilling,
approximately $420,000 was spent in the Brigham Agreement, $880,000 in the
Spivey Field in Kansas, $100,000 in the Wellman Unit in Texas, and the remainder
was spent on several wells in Louisiana, Mississippi and Oklahoma. Of the
$431,000 spent on workovers, approximately $80,000 was spent at Wild Fork Creek
Field in Alabama, $44,000 at the Wright Field in Louisiana, $30,000 at Magnolia
in Arkansas and $25,000 at Lake Trammel Field in Texas. The remaining amount was
spent on several different properties. The $700,000 total amount spent on
prospects consisted primarily of $286,000 on Reflection Ridge in Kansas,
$232,000 on Hawkins Ranch in Texas, $67,000 on the Sherburne Prospect in
Louisiana, $31,000 on the Quarry Prospect in New Mexico and $55,000 on S.
Highbaugh in Texas. Middle Bay spent $7,140,000 on the Bison Merger. This
includes the $1,446,000 in non-oil and gas assets, which were subsequently sold
for the amount paid. Middle Bay spent $514,000 on the Shore Merger. Amounts
spent on debt retirement consisted principally of the payment in full of the
note assumed in the Shore Merger of $2,105,000, monthly principal payments on
the $385,000 term note assumed in the NPC Merger and the refinancing of the NPC
term note of $274,000. The principal payments on the $6 million convertible loan
were suspended when Middle Bay converted the $5.6 million term note to a $6
million convertible loan on April 3, 1996.
Middle Bay incurred $1,119,000 in dry hole costs consisting principally
of three wells drilled in Louisiana and one well drilled in Oklahoma. The
Louisiana wells were the Shore Oil Company #1, the Sabine #1 and the Middle Bay
Oil Company #1 with dry-hole costs of $311,000, $177,000 and $168,000,
respectively. The Oklahoma well was the Hannah #1 with a dry hole cost of
$301,000.
Middle Bay incurred $223,000 in geological and geophysical costs ("G&G
Costs") which consisted primarily of $130,000 in geological and geophysical
costs on the Reflection Ridge Prospect and $62,000 on the Hawkins Ranch
Prospect. The above discussion of capital costs does not include amounts
expensed as dry hole and geological and geophysical costs.
- 65 -
<PAGE> 77
Middle Bay had current assets of $4,223,000 and current liabilities of
$2,891,000, which resulted in working capital of $1,332,000 at December 31,
1997. This was an increase of $546,000 from working capital of $786,000 at
December 31, 1996. Working capital increased primarily due to increased cash
flow from operations, cash proceeds from stock option exercises, and no monthly
principal payments on the Convertible Loan, offset partially by increased
amounts spent on exploratory and developmental drilling and working capital
changes. The current maturity of long-term debt was higher in 1997 because of
the larger principal balance requiring payment in the following year. In 1997,
the $50 million Convertible Loan requires principal payments beginning April 1,
1998 versus the $6 million Convertible Loan requiring principal payments
beginning October 1, 1997 in the comparable period. Middle Bay's current ratio
of 2.78, calculated under the terms of the Convertible Loan which excludes
stockholder receivables and debt due under the $50 million Convertible Loan, is
in excess of the 0.90 to 1.00 required.
CAPITAL RESOURCES AND LIQUIDITY -- SIX MONTHS ENDED JUNE 30, 1997 AND 1998
Cash flow from operating activities for the current period of
$1,133,000 decreased $159,000 over the comparable period. The decrease in cash
flow was due primarily to higher G&G expenses and higher G&A expenses offset by
increases in cash flow from oil and gas and working capital changes. Cash flow
from oil and gas properties increased $1,133,000 over the comparable period. Oil
and gas prices decreased 38% and 9%, respectively, while oil and gas production
increased 174% and 149%, respectively. The change in working capital increased
cash flow by $859,000 over the comparable period. The change in working capital
was caused principally by timing differences in the payment of expenses and
receipt of revenues. The cash flow to debt coverage ratio of 1.71 is greater
than the 1.25 required under the $100 million Revolver agreement. The Company
made $381,000 of required principal payments under the $100 million Revolver in
the current period. The Company also made a principal payment of $1,500,000 on
the $100 million Revolver ten days after the close of the Enex tender offer.
Additions to oil and gas properties were higher than the comparable
period due primarily to the increased drilling activity. The amount spent on
acquisitions is higher due to the Enex acquisition that closed March 27, 1998
and the Service acquisition that closed April 16, 1998. The Company acquired
approximately 79% of Enex common stock for cash in a tender offer that closed
March 27, 1998. The Company also acquired substantially all of the oil and gas
assets of Service Drilling for cash and common stock. The increase in the amount
of cash used for debt payments was due to replacing the $50 million Convertible
Loan with a principal balance of $10,956,000 with the $100 million Revolver and
principal payments of $1,881,000 on the $100 million Revolver. No monthly
principal payments have been required over the period April 1, 1997 to March 31,
1998 on the Company's $6 million, $15 million and $50 million Convertible Loans.
The increase in the proceeds from debt issued was due to proceeds from the $100
million Revolver which were used to replace the $50 million Convertible Loan, to
finance the Enex acquisition and to partially finance the Service acquisition.
No preferred stock was issued in the current period versus the $9 million issued
under the Preferred Stock Agreement with Kaiser-Francis in the comparable
period. Kaiser-Francis converted all of the Series A Preferred Stock on January
31, 1998.
- 66 -
<PAGE> 78
The Company's operating activities provided net cash of $1,133,000 for
the current period. During this period, net cash from operations and cash on
hand was used principally for acquisitions and exploratory and developmental
drilling. Approximately $149,000 was spent to acquire a well in the Spivey
Field. Approximately $780,000 was spent on exploratory drilling. The principal
exploratory wells in the current period were the S. Highbaugh Prospect well
($199,000) and the Sherburne Prospect well ($350,000). Approximately $1,269,000
was spent on developmental drilling. The principal developmental wells drilled
in the current period were the Kuehling #1 sidetrack ($529,000) in the Esther
Field, several wells in the Lake Trammel Field ($172,000) and a workover on a
well in the Abbeville Field ($122,000). Additional developmental drilling was
done in the Convis, Custer City, Spivey and Wellman Fields. The Company spent
approximately $15,960,000 on the Enex acquisition which was financed entirely
with debt proceeds from the $100 million Revolver. The Company spent
approximately $6,500,000, excluding post-closing adjustments, on the cash
portion of the Service acquisition, $1,000,000 from cash on hand and the
remainder with proceeds from the $100 million Revolver. Amounts spent on debt
retirement consisted principally of the replacement of the $50 million
convertible loan.
The Company had current assets of $7,642,000 and current liabilities of
$7,241,000, which resulted in working capital of $401,000 as of June 30, 1998.
This was a decrease of $912,000 from the working capital of $1,313,000 as of
December 31, 1997. Working capital decreased primarily due to the higher current
maturity of long-term debt and higher accounts payable. Current assets in the
current period include $1,741,000 of oil and gas properties that were sold at
auction on August 12, 1998. The current maturity of long-term debt increased
because the amount of debt outstanding increased in connection with the Enex and
Service acquisitions. Accounts payable increased because of the increased number
of properties and increased drilling activity. The Company's current ratio of
2.33, calculated under the terms of the $100 million Revolver agreement, which
excludes stockholder receivables and debt due under the $100 million Revolver,
was in excess of the 0.90 to 1.00 required.
Abandonment Accruals
In the current period, the Company estimated abandonment accruals
amounting to approximately $485,000. An abandonment accrual of $450,000 was made
for certain properties located in Florida. These properties were acquired in the
Enex acquisition and are expected to be plugged and abandoned in the third or
fourth quarter of 1998.
Minor Property Sale
On August 12, 1998, the Company received gross proceeds of
approximately $2,528,000 for various nonstrategic properties that were auctioned
by Oil and Gas Asset Clearinghouse. The Company also sold certain other
properties in private sales in July and August for gross proceeds of $1,195,000.
Under the terms of the $100 million Revolver, when mortgaged properties are sold
the borrowing base shall be reduced and, if necessary, proceeds from the sales
of properties shall be applied to the debt outstanding in an amount equal to the
loan value attributable to such properties sold.
- 67 -
<PAGE> 79
$100 Million Line of Credit
In conjunction with the Enex acquisition on March 27, 1998, the Company
entered into a new debt agreement with the banks. The new debt agreement is a
$100 million reducing, revolving line of credit (the "$100 million Revolver")
with current borrowings under a term note maturing April 1, 2001. The entire
principal balance of the Company's $50 million Convertible Loan at the Bank of
Oklahoma was replaced with the $100 million Revolver. The Bank of Oklahoma is a
participating lender with Compass Bank.
The $100 million Revolver provided for an initial borrowing base of $29
million. The initial borrowing base was reduced to $27.5 million within ten days
after the effective date and further reduced by $275,000 per month beginning May
1, 1998 and ending October 1, 1998. In conjunction with the Service acquisition,
the borrowing base was increased to $32,600,000 and the monthly borrowing base
reductions were increased to $330,000. The borrowing base and the scheduled
reduction amount shall be redetermined semi-annually by unanimous consent of the
lenders beginning October 1, 1998. The principal is due at maturity, April 1,
2001. Monthly principal payments are made as required in order that the
outstanding principal balance does not exceed the borrowing base. Interest is
payable monthly and is calculated at the prime rate. The Company may elect to
calculate interest under the Libor rate, as defined in the agreement. The Libor
rate increases by (a) 2.00% if the outstanding loan balance and letters of
credit are equal to or greater than 75% of the borrowing base, (b) 1.75% if the
outstanding loan balance and letters of credit are less than 75% or greater than
50% of the borrowing base, or (c) 1.50% if the outstanding loan balance and
letters of credit are equal to or less than 50% of the borrowing base. Libor
interest is payable at maturity of the Libor loan, which cannot be less than
thirty days.
At September 30, 1998, the Company had $27,455,000 outstanding under
the $100 million Revolver and approximately $1,350,000 of outstanding letters of
credit. As of September 30, 1998, the Company is paying Libor plus 2.00% on a
sixty-day Libor loan for $25,470,000 and prime on $1,985,000.
The Company paid a facility fee equal to 3/8% of the initial borrowing
base and is required to pay 3/8% on any future increase in the borrowing base
within five days of written notice. The Company is required to pay a quarterly
commitment fee on the unused portion of the borrowing base of one-half percent
if the outstanding loan balance plus letters of credit are greater than 50% of
the borrowing base or three-eighths percent if the outstanding loan balance plus
letters of credit are less than or equal to 50% of the borrowing base. The
Company is required to pay a letter of credit fee on the date of issuance or
renewal of each letter of credit equal to the greater of $500 or one and
one-half percent of the face amount of the letter of credit.
The Company has granted to the banks liens on substantially all of the
Company's oil and natural gas properties, whether currently owned or hereafter
acquired, and a negative pledge on all other oil and gas properties. The $100
million Revolver requires, among other things, a cash flow coverage ratio of
1.25 to 1.00 and a current ratio of 0.9 to 1.00 determined on a quarterly basis.
The $100 million Revolver prohibits the payment of any cash dividend or
distribution or the purchase of any class of its capital stock.
- 68 -
<PAGE> 80
Series B Preferred Stock
In connection with the Shore Merger, effective June 30, 1997, the
Company issued 266,667 shares of Series B Preferred Stock ("Series B"). The
Series B is nonvoting and pays no dividends. The Series B has a liquidation
value of $7.50 per share and was junior to the Series A Preferred. For a period
of sixty-six months subsequent to June 30, 1997, any holder of the Series B may
convert all or any portion of Series B shares into Middle Bay common stock
("Common") at a ratio of one share of Common for each Series B share, or at any
time on or after January 1, 1998, the holders may convert a portion of their
Series B shares based on a conversion method whereby a number of convertible
Series B shares are exchanged using the Alternative Conversion Factor, which is
calculated as the increase in value of approximately 40,000 net mineral acres in
South Louisiana owned by the Company at the end of the year divided by $8
million.
The Alternative Conversion Factor is then multiplied by 1,066,000 to
arrive at the potential converted number of common shares received. Upon
expiration of the conversion period, unless the Company has given notice to
redeem the Series B, all of the shares of Series B shall be automatically
converted. In no event shall the aggregate total number of shares of Common into
which the Series B are converted be less than 266,667 shares or exceed 1,333,333
shares, unless further increased for any anti-dilution provisions.
As of June 30, 1998, no additional shares of Series B have been issued.
Stock Purchase Agreement
On September 4, 1996, the Company signed a stock purchase agreement
with Kaiser Francis Oil Company ("the Agreement"). The Agreement provides for
the purchase of 1,666,667 shares of Series A Preferred Stock ("Series A") at
$6.00 per share over a five-year period beginning September 4, 1996 with minimum
incremental investments of $500,000 each. Each issuance of Series A is subject
to approval by Kaiser-Francis of the use of proceeds. The Series A is nonvoting
and accrues dividends at 8% per annum, payable quarterly in cash. The Series A
is convertible at any time after issuance into shares of common stock at the
rate of two shares of common stock for each share of preferred before January 1,
1998. At December 31, 1997, all of the Series A had been issued and on January
31, 1998, all of the Series A was converted.
The Enex Acquisition
On March 27, 1998, the Company acquired 1,064,032 shares of the common
stock of Enex, for $15 cash per share pursuant to the Company's tender offer
that began February 19, 1998. The Enex shares acquired by the Company represent
79.2% of the total outstanding Enex common stock. The Company applied the
purchase method of accounting to the Enex acquisition. The purchase price of
$15,960,480 was financed with proceeds from the Company's $100 million Revolver.
The Company also incurred approximately $60,934 in legal, accounting and
printing expenses and issued 33,825 shares of Company common stock for finders
fees to unrelated third parties.
- 69 -
<PAGE> 81
As part of the Enex acquisition, the Company entered into an agreement,
effective April 15, 1998, with the former president of Enex that provides for
monthly payments of $20,000 until expiration of the agreement on May 18, 2002.
The present value of the agreement, applying a 10% discount rate, is
approximately $788,000 and is included in other liabilities (current and long
term). The monthly payments serve as consideration for consulting, a covenant
not to compete and a preferential right to purchase certain oil and gas
acquisitions which the former president controls or proposes to acquire during
the term of the agreement. The Company will reimburse the former president each
month for reasonable and necessary business expenses incurred in connection with
the performance of consulting services. The agreement survives the former
president and his spouse and is nonassignable.
Enex, a Delaware corporation, is an independent oil and gas production
and development company headquartered in Kingwood, Texas with operations
primarily in Texas. Enex engages primarily in managing and acquiring producing
oil and gas properties and does not engage in significant drilling activities.
Enex operates over 100 wells in South Texas. Enex shares are traded on the
NASDAQ Stock Market National Market System under the symbol ENEX. Concurrent
with the closing of the Enex acquisition, the Enex Board of Directors resigned
and were replaced by the persons who constitute Middle Bay's Board of Directors.
Enex is presently being operated as a majority-owned subsidiary of the Company.
In addition to managing and acquiring direct interests in producing oil
and gas properties, Enex serves as general partner of Enex Consolidated
Partners, L.P. (the "Enex Partnership"). The Enex Partnership is a New Jersey
limited partnership that was formed on June 30, 1997 from the combination of
thirty-four Enex oil and gas limited partnerships. The Enex Partnership, also
headquartered in Kingwood, Texas, is engaged in the oil and gas business through
the ownership of various interests in oil and gas properties. Approximately 73%
of Enex's estimated future net revenues from proved reserves at December 31,
1997 is attributable to its interests in the Enex Partnership and approximately
27% is attributable to the properties owned directly by the Company, after
deducting the minority interest share of the Enex Partnership. As general
partner, Enex has a 4.1% interest in the net revenues and gains generated by
properties owned by the Enex Partnership. In addition to the general partner
interest, Enex owns a 56.2% limited partner interest in the Enex Partnership.
The Enex Partnership makes periodic cash distributions to the limited
partners. The distributions for the six months ended June 30, 1998 and the years
ended 1997 and 1996 were approximately $4.5 million and $2.4 million,
respectively. Considering its general and limited partner interest, Enex's total
interest in the Enex Partnership is approximately 57.99%. Based on the Company's
79.2% ownership of Enex, the Company has an effective ownership of the Enex
Partnership of 45.9%
Because the Company's ownership of Enex is greater than 50%, the
Company's consolidated financial statements at June 30, 1998 include 100% of the
accounts of Enex and the Enex Partnership. Enex consolidates 100% of the Enex
Partnership on its books for financial reporting purposes because its ownership
in the Enex Partnership is greater than 50%. The minority interest on the
Company's books reflects the equity interest of the minority partners in Enex
(20.8%) and the minority partners in the Enex Partnership (43.8%).
The operations of Enex and the Enex Partnership for the three months
ended June 30, 1998 were included in the financial statements of the Company.
- 70 -
<PAGE> 82
Future Capital Requirements
The Company has made and will continue to make substantial capital
expenditures for acquisition, development and exploration of oil and natural gas
reserves. In fact, because the Company's principal natural gas and oil reserves
are depleted by production, its success is dependent upon the results of its
acquisition, development and exploration activities.
The Company expects to incur a minimum of approximately $2,000,000 in
capital expenditures over the next twelve months. The Company expects that
available cash, cash flows from operations and cash proceeds from asset sales of
certain noncore properties will be sufficient to fund the planned capital
expenditures through 1998 in addition to funding interest and principal
requirements on the $100 million Revolver. However, the Company may require
additional borrowings under the $100 million Revolver or additional equity
funding to raise additional capital to fund any acquisitions.
Because future cash flows and the availability of financing are subject
to a number of variables, such as the level of production and prices received
for gas and oil, there can be no assurance that the Company's capital resources
will be sufficient to maintain planned levels of capital expenditures.
At June 30, 1998, the principal outstanding under the $100 million
Revolver was approximately equal to the borrowing base. Under the terms of the
$100 million Revolver, the borrowing base declines $330,000 per month. Assuming
no changes in the outstanding letters of credit, the Company could be required
to make monthly principal payments of approximately $330,000 until the next
borrowing base redetermination on October 1, 1998.
Subsequent to determination of the current borrowing base, oil and gas
prices have declined. As the bank's judgement about oil and gas prices impacts
borrowing base redeterminations, principal payments may increase or decrease
upon redetermination. Funds spent on debt retirement reduce the amount of cash
flow available to spend on acquisition, development and exploration activities.
The Company paid $1.5 million on the $100 million Revolver on April 10, 1998 and
$51,000 in May. The Company paid approximately $330,000 per month in the four
months ending in September. The Company paid an additional $2,145,000 in the
third quarter with proceeds from property sales.
In the future, the Company expects to close Enex and the Enex
Partnership's headquarters at Kingwood and consolidate Enex and the Enex
Partnership's operations at the Company's headquarters in Houston. It is
expected that the Company will realize certain cost savings in the consolidation
of these operations.
Current Activities
As of September 30, 1998, one exploratory well was being drilled and
one developmental well was being completed.
- 71 -
<PAGE> 83
Year 2000 Computer Issues
The Company has completed its internal reviews of Year 2000 issues and
has identified three areas that, if not adequately addressed, could materially
impact Middle Bay: (1) accounting systems and information technology systems;
(2) computer controlled and other embedded technology; and (3) third-party
compliance.
The Company has updated its accounting software so that it is Year
2000 compliant. Middle Bay has reviewed all other information technology systems
and believes them to be Year 2000 compliant or capable of timely conversion to
Year 2000 compliance for an additional nonmaterial cost.
Middle Bay owns or leases only a small minority of the pumping and
other equipment necessary to service the fields in which it has an interest.
While it is currently evaluating the extent to which this machinery may contain
non-Year 2000 compliant embedded systems, Middle Bay believes that a large scale
failure of such equipment could have a negative material impact on the Company.
Middle Bay has a material interest in a large number of fields which
are operated by third parties. The simultaneous failure of the operation of a
large number of these third-party fields could have a negative material impact
on the Company. Middle Bay is making individual inquiries as to the state of
each operator's Year 2000 preparation activities. Middle Bay cannot, however,
accurately predict at this time how many, if any, of these third parties will
adequately address their Year 2000 issues. Middle Bay would also likely suffer a
material adverse impact if its banking institutions do not adequately address
their Year 2000 issues, if any. Middle Bay is currently inquiring into any such
issues.
Middle Bay does not currently have a contingency plan in place
sufficient to address all Year 2000 issues related to third-party preparedness.
Middle Bay is currently evaluating the feasibility and effectiveness of such a
plan.
GENERAL
On September 4, 1996, Middle Bay signed a Preferred Stock Agreement
with Kaiser-Francis. The Preferred Stock Agreement provides for the purchase of
1,666,667 shares of Series A by Kaiser-Francis over a five-year period,
beginning September 4, 1996, with minimum incremental investments of $500,000
each. Each issuance is subject to approval by Kaiser-Francis of the use of
proceeds. The Series A was nonvoting and accrued dividends at 8% per annum,
payable quarterly in cash. At December 31, 1997, 100% of the Series A had been
issued to partially finance the NPC, Bison and Shore Mergers, and in January,
1998, Kaiser- Francis converted 100% of the Series A into 3,333,334 shares of
Middle Bay common stock.
In connection with the merger with Shore Oil Company effective June 30,
1997, Middle Bay issued 266,667 shares of Series B Preferred Stock ("Series B").
The Series B is nonvoting and pays no dividends. The Series B has a liquidation
value of $7.50 per share and is junior to the Series A Preferred. For a period
of sixty-six months subsequent to June 30, 1997, any holder of the Series B may
convert all or any portion of Series B shares into Middle Bay common stock at a
ratio of one share of common stock for each Series B share, or at any time on or
after January 1, 1998, the holders may convert a portion of their Series B
shares
- 72 -
<PAGE> 84
based on a conversion method whereby a number of convertible Series B shares are
exchanged using the Alternative Conversion Factor, which is calculated as the
increase in value of approximately 40,000 net mineral acres in South Louisiana
owned by Middle Bay at the end of the year divided by $8 million.
The Alternative Conversion Factor is then multiplied by 1,066,000 to
arrive at the potential converted number of common shares received. Upon
expiration of the conversion period, unless Middle Bay has given notice to
redeem the Series B, all of the shares of Series B shall be automatically
converted. In no event shall the aggregate total number of shares of common
stock into which the Series B are converted be less than 266,667 shares or
exceed 1,333,333 shares, unless further increased for any anti-dilution
provisions.
Middle Bay's liquidity position and current and anticipated cash flows
from operations remain adequate for its general requirements. However, because
future cash flows and the availability of financing are subject to a number of
variables, such as the level of production and prices received for gas and oil,
there can be no assurance that Middle Bay's capital resources will be sufficient
to maintain planned levels of capital expenditures.
CAPITAL EXPENDITURES -- FISCAL 1997 AND FISCAL 1996
Total capital expenditures, excluding mergers, for oil and gas
properties in fiscal 1997 and 1996 were $7,316,000 and $1,597,000, respectively.
Total capital expenditures for mergers in 1997 and 1996 were $27,586,000 and
$2,618,000, respectively. Total capital expenditures for dry holes and G&G in
1997 and 1996 were $1,341,000 and $429,000, respectively.
Middle Bay has made and will continue to make substantial capital
expenditures for acquisition, development and exploration of oil and natural gas
reserves. In fact, because Middle Bay's principal natural gas and oil reserves
are depleted by production, its success is dependent upon the results of its
acquisition, development and exploration activities.
Middle Bay, excluding Enex and Service Drilling, expects to incur a
minimum of approximately $1,400,000 in capital expenditures over the next twelve
months. Middle Bay expects that available cash, cash flows from operations and
cash proceeds from asset sales of certain noncore properties will be sufficient
to fund the planned capital expenditures through 1998, in addition to funding
interest and principal requirements on the $100 million credit facility.
However, Middle Bay may require additional borrowings under the $100 million
credit facility or additional equity funding to raise additional capital to fund
any acquisitions.
Because future cash flows and the availability of financing are subject
to a number of variable, such as the level of production and prices received for
gas and oil, there can be no assurance the Middle Bay's capital resources will
be sufficient to maintain planned levels of capital expenditures.
Middle Bay does not anticipate that it will incur any material
expenditures to address Year 2000 issues. Except as disclosed under "Capital
Resources and Liquidity - Year 2000 Issues," above, Year 2000 issues do not
represent a known material event or uncertainty to Middle Bay. To the extent
that Middle Bay may be
- 73 -
<PAGE> 85
adversely affected by Year 2000 issues of its suppliers, customers and other
entities, Middle Bay does not believe it will be more adversely affected than
other companies in its industry with similar operations.
RECENTLY-ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." This statement establishes
standards for reporting and display of comprehensive income and its components
in the Company's financial statements. Comprehensive income includes all changes
in the Company's equity except investments by and distributions to owners and
includes, among other things, foreign currency translation adjustments. In June
1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments be included in
interim reports issued to shareholders. Both of these statements are effective
for financial statements for periods beginning after December 15, 1997. As both
SFAS Nos. 130 and 131 establish standards for reporting and display, the Company
does not expect the adoption of these statements to have a material impact on
its financial condition or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes standards of
accounting for and disclosures of derivative instruments and hedging activities.
This statement is effective for fiscal years beginning after June 15, 1999. As
Middle Bay historically has not entered into derivative instruments for
non-trading (hedging) purposes or for trading purposes, the Company does not
expect this statement to have a material impact on its financial condition or
results of operations upon implementation.
- 74 -
<PAGE> 86
SELECTED FINANCIAL DATA - PARTNERSHIP
PARTNERSHIP SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following selected financial data for the Partnership as of and for
each of the years in the two-year period ended December 31, 1997 are derived
from the Partnership's audited financial statements. The selected consolidated
financial data for the six months ended June 30, 1997 and 1998 are derived from
the Partnership's unaudited financial statements. In the opinion of management,
such unaudited financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary for a fair presentation of the financial
condition and results of operations as of and for the periods presented. The
balance sheet data for the Partnership as of December 31, 1996 is not available
because the Partnership was not formed until June 30, 1997. All of the operating
data for the Partnership prior to June 30, 1997 is a summation of the individual
partnerships' selected financial data. The following financial information
consists of pro forma data for the years ended December 31, 1997 and 1996 for
the combined partnerships assuming the consolidation had taken place at January
1, 1997 and 1996, respectively. Operating results for the six months ended June
30, 1998 are not necessarily indicative of the results that may be expected for
the entire fiscal year ending December 31, 1998. The selected financial data
below should be read in conjunction with the Partnership's financial statements
and related notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
Years Ended December 31, June 30,
------------------------ --------
1996 1997 1997 1998
---- ---- ---- ----
Operating Data (in thousands, except per-unit amounts)
- --------------
<S> <C> <C> <C> <C>
Oil and gas sales $12,345 $11,161 $ 5,820 $ 3,259
Gain from sale of property 242 742 6 505
Other revenue 9 94 22 5
------- ------- ------- -------
Total revenue 12,596 11,997 5,848 3,769
Lease operating costs and production
taxes 4,925 4,968 2,472 1,588
Interest expense 2 - - -
Depletion, depreciation and amortization 2,145 1,839 1,048 932
General and administrative 1,976 1,611 817 607
------- ------- -------- --------
Total expenses 9,048 8,418 4,337 3,127
Net income (loss) 3,548 3,579 1,511 642
======= ======= ======= =======
Net increase (decrease) in cash and
cash equivalents 220 219 29 331
Net cash provided by operating activities 3,464 5,122 2,972 1,605
Distributions 2,744 5,152 2,842 2,188
Per-Unit Operating Data
- -----------------------
Net income (loss) 3.22 3.25 1.37 0.58
Distributions of earnings 2.49 4.67 2.58 1.98
Distributions representing a return of
capital - - - -
</TABLE>
- 75 -
<PAGE> 87
<TABLE>
<CAPTION>
(Unaudited)
December 31, June 30,
------------ --------
1996 1997 1997 1998
---- ---- ---- ----
Balance Sheet Data (in thousands, except per-unit amounts)
- ------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 924 $ 1,142 $ 953 $ 1,473
Total assets at book value 16,960 13,414 13,924 11,927
Total assets at the value assigned for
purposes of roll-up transaction
Total liabilities 2,680 542 1,048 602
General and limited partners' equity:
General partner 1,328 71 - 10
Limited partners 12,522 12,800 12,876 11,314
Per-Unit Balance Sheet Data
- ---------------------------
Book value 11.36 11.61 11.68 10.27
Value assigned for purpose of the
roll-up transaction
</TABLE>
- 76 -
<PAGE> 88
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PARTNERSHIP
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Partnership's Financial Statements and Notes thereto set forth herein.
RESULTS OF OPERATIONS
The Company was formed on June 30, 1997 from the combination of
thirty-four limited partnerships. The Consolidation created a new accounting
basis in the carrying value of property. Oil and gas property was written down
by $1,561,322 from the net carrying value of property in the combined
Predecessor Partnerships. The decremental depletion associated with the net
decrease in property was approximately $123,000 for the last six months of 1997.
To facilitate comparisons between periods, results of operations are
presented on both an actual basis for the Enex Consolidated Partnership, L.P.
and the Predecessor Partnerships and on a pro forma basis as if the
Consolidation had taken place at the beginning of each period presented. These
results do not reflect the results which would have been obtained if the
Consolidation had actually occurred on the dates indicated or the results that
may be expected in the future.
The following financial information consists of pro forma data for the
years ended December 31, 1997 and 1996 for the combined partnerships assuming
the consolidation had taken place at January 1, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Revenues:
Oil and gas sales $10,003,768 $11,296,811
Gas plant sales 1,157,068 1,048,688
Gain from sale of property 741,617 242,389
Other revenues 21,000 49
Interest income 73,848 8,800
Total revenues 11,997,301 12,596,737
Expenses:
Depreciation and depletion 1,839,877 2,145,385
Lease operating expenses 3,589,836 3,616,133
Gas purchases and expenses 809,336 670,358
Production taxes 568,321 637,476
General and Administrative:
Allocated from general partner 1,270,556 1,646,201
Direct expense 340,665 329,800
Interest expense - 2,498
Total expenses 8,418,591 9,047,851
Net Income $3,578,710 $3,548,886
</TABLE>
- 77 -
<PAGE> 89
The total combined oil, gas and gas plant sales decreased to
$11,160,836 in 1997 from $12,345,499 in 1996. This represents a decrease of
$1,184,663 or 10%. Oil sales decreased by $1,419,810 or 20%. A 12% decrease in
oil production due to natural production declines caused sales to decrease by
$877,908. A 9% decrease in the average oil sales price decreased oil sales by an
additional $541,902. Gas sales increased by $147,655 or 3%. A 10% increase in
the average gas sales price increased revenues by $388,395. This was offset by a
5% decrease in gas production. Sales of natural gas liquids and gas plant gas
increased by $87,492 or 10%. A 15% increase in the average gas plant products
sales price increased sales by $130,370. This increase was partially offset by a
5% decrease in production of gas plant products. The decreases in oil, natural
gas and gas plant products production were primarily a result of natural
production declines. The decrease in oil sales price corresponds with changes in
the overall market for the sale of oil. The increases in the gas and gas plant
products average sales price correspond with changes in the overall market for
these products.
The total combined lease operating expenses decreased to $3,589,836 in
1997 from $3,616,133 in 1996. The decrease of $26,297 or 1% was primarily due to
the changes in production, noted above.
The total combined depreciation and depletion expense decreased to
$1,839,877 in 1997 from $2,145,385 in 1996. This represents a decrease of
$305,508 or 14%. A 1% decrease in the depletion rate reduced depreciation and
depletion expense by $116,822. The changes in production, noted above, reduced
depreciation and depletion expense by an additional $188,686. The decrease in
the depletion rate was primarily due to relatively higher production from
properties with a relatively lower depletion rate, partially offset by downward
revisions of oil and gas reserves during December 1997.
The total combined general and administrative expenses decreased to
$1,611,221 in 1997 from $1,976,001 in 1996. This represents a decrease of
$364,780 or 18% from 1996 to 1997. This decrease was primarily due to less staff
time being required to manage the Partnership's operations as a result of the
consolidation of the Predecessor Partnerships.
In 1996, the Predecessor Partnerships sold their interests in the Grass
Island, Enexco and Comite acquisitions for $235,000, $64,000 and $55,000,
respectively. Gains of $69,731, $61,648 and $21,649, respectively, were
recognized on these sales. The Predecessor Partnerships also sold their
interests in the E.M. Lane well and the Harper #1 well for $57,970 and $55,000,
respectively. Gains of $31,310 and $44,642, respectively, were recognized on
these sales. The Predecessor Partnerships also sold their interests in three
other wells in 1996 for $59,630. These sales resulted in a net gain of $13,409
to the Predecessor Partnerships. The impact of these sales on current and future
revenues is not expected to be material, as such interests represented less than
10% of historical and future net revenues.
In 1997, the Partnership sold its interest in the North Buck Draw Unit
for $857,120. A gain of $758,969 was recognized on the sale. The Partnership
sold its interest in the Mcbride acquisition for $56,306. A loss of $25,405 was
recognized on the sale. The Partnership also sold its interest in two other
acquisitions for $8,053. A net gain of $8,053 was recognized by the Partnership
from the sales. The impact of these sales on current and future revenues is not
expected to be material, as such interests represented less than 10% of
historical and future net revenues.
- 78 -
<PAGE> 90
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's cash flow provided by operating, financing and
investing activities is a direct result of the amount of net proceeds realized
from the sale of oil and gas production. Accordingly, the changes in cash flow
from 1996 to 1997 are primarily due to the changes in oil and gas sales
described above. It is the General Partner's intention to distribute
substantially all of the Partnership's available net cash flow to the partners.
In 1997 and 1996, the Partnership and its Predecessor Partnerships paid
total combined distributions of $4,593,955 and $2,464,947, respectively, to its
limited partners. The Partnership will continue to recover its reserves and
distribute to the limited partners the net proceeds realized from the sale of
oil and gas production after payment of debt obligations. The Partnership plans
to repay the amount owed to the General Partner in 1998. The payment of future
distributions will depend on the Partnership's earnings, financial conditions,
working capital requirements and other factors, although it is anticipated that
regular quarterly distributions will continue through 1998.
At December 31, 1997, the Partnership had no material commitments for
capital expenditures. The Partnership does not intend to engage in any
significant developmental drilling activity. The Partnership does not intend to
purchase additional properties or fund extensive development of existing oil and
gas properties and, as such, has no long-term liquidity needs. The Partnership's
projected cash flows from operations are expected to provide sufficient funding
to pay its operating expenses and debt obligations.
In February 1998, Middle Bay Oil Company, Inc., an independent oil and
gas producer, announced a tender offer for all of the outstanding shares of Enex
Resources Corporation ("Enex"), the Partnership's general partner. The tender
offer was accepted by a majority of Enex shareholders and was completed on March
27, 1998.
The Partnership does not anticipate that it will incur any significant
expenditures to address Year 2000 issues, nor do Year 2000 issues represent a
known material event or uncertainty to the Partnership. To the extent that the
Partnership may be adversely affected by the Year 2000 issues of its suppliers,
customers and other entities, the Partnership does not believe that it will be
more adversely affected than other companies in its industry with similar
operations.
SIX MONTHS ENDED JUNE 30, 1997 AND 1998
Oil and gas sales for the first six months decreased from $5,200,270 in
1997 to $3,241,097 in 1998. This represents a decrease of $2,560,995 (38%). Oil
sales decreased by $1,344,931 (45%). A 14% decrease in oil production reduced
sales by $422,861. A 35% decrease in the average oil sales price decreased oil
sales an additional $922,070. Gas sales decreased by $614,242 (28%). A 20%
decrease in gas production decreased sales by $422,226. A 10% decrease in the
average gas sales price decreased gas sales by an additional $172,016. The
changes in the average oil and gas sales price correspond with changes in the
overall market for the sale of oil and gas. The prices of oil and gas were lower
in 1998 versus 1997. The decreases in oil and gas production were primarily the
result of natural production declines.
- 79 -
<PAGE> 91
Gas plant sales decreased from $619,555 in the first six months of 1997
to $17,733 the first six months of 1998. This represents a decrease of $601,822
or 97%. This decrease was due primarily to the sale of the Dover Hennessey Gas
Plant which was effective January 1, 1998.
Lease operating expenses decreased from $1,743,841 in the first six
months of 1997 to $1,417,661 in the first six months of 1998. The decrease of
$326,180 (19%) is primarily due to the sale of the Lake Decade and McBride
acquisitions in 1997.
Depreciation and depletion expense decreased from $1,048,413 in the
first six months of 1997 to $932,013 in the first six months of 1998. This
represents a decrease of $116,400 (11%). The change in production (noted above)
reduced depreciation and depletion expense by $277,994. This was partially
offset by a 3% increase in the depletion rate. The rate increase was primarily
due to downward revisions of the oil and gas reserves during December, 1997.
Effective January 1, 1997, the Partnership sold its interests in the
Perkins well in the Burkholder acquisition for $5,940. A gain of $5,940 was
recognized on this sale.
Effective January 1, 1998, the Partnership sold its interest in the
Dover Hennessey Gas Plant for $1,000,000. A gain of $671,923 was recognized on
the sale. Effective June 1, 1998, the Partnership sold its interest in the
Corkscrew acquisition for $36,000. A loss of $167,302 was recognized on the
sale.
General and administrative expenses decreased from $816,647 in the
first six months of 1997 to $606,900 in the first six months of 1998. This
decrease of $209,747 (26%) is primarily due to a reduction in staff as a result
of the consolidation of the Partnership in June, 1997.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's cash flow from operations is a direct result of the
amount of net proceeds realized from the sale of oil and gas production.
Accordingly, the changes in cash flow from 1997 to 1998 are primarily due to the
changes in oil and gas sales described above and the sale of oil and gas
properties. It is the General Partner's intention to distribute substantially
all of the Partnership's available cash flow to Unitholders. The Partnership's
"available cash flow" is essentially equal to the net amount of cash provided by
operating, financing and investing activities.
The Partnership will continue to recover its reserves and distribute to
the partners the net proceeds realized from the sale of oil and gas production
after the payment of its debt obligations. Distribution amounts are subject to
change if net revenues are greater or less than expected. Nonetheless, the
General Partner believes the Partnership will continue to have sufficient cash
flow to fund operations and to maintain a regular pattern of distributions.
As of June 30, 1998, the Partnership had no material commitments for
capital expenditures. The Partnership does not intend to engage in any
significant developmental drilling activity.
- 80 -
<PAGE> 92
CERTAIN COMPARATIVE INFORMATION
The following table sets forth certain unaudited comparative per-Unit
and per-share data based on (i) the financial statements of the Partnership and
Middle Bay at and for the six months ended June 30, 1998 (unaudited) and the
year ended December 31, 1997, and (ii) the unaudited pro-forma financial
information for Middle Bay presented elsewhere in this Prospectus. The
equivalent pro-forma information for Middle Bay is based on a basic share
computation and assumes that the Partnership will approve the Proposal pursuant
to the terms contained herein.
<TABLE>
<CAPTION>
At and for the Six Months At and for the Year Ended
Ended June 30, 1998 December 31, 1997
------------------- -----------------
Equivalent Equivalent
Historical Pro-Forma Historical Pro-Forma
---------- --------- ---------- ---------
Partnership
- -----------
<S> <C> <C> <C> <C>
Book value per Unit 10.26 - 11.61 -
Cash distributions per Unit 1.98 - 4.17 -
Net income (loss) per Unit .58 - 2.89 -
Middle Bay
- ----------
Book value per common share 2.28 2.28 1.39 1.39
Net income (loss) per share (.28) (.39) (4.76) (2.91)
Dividends per share - - - -
</TABLE>
- 81 -
<PAGE> 93
SELECTED PRO FORMA CONSOLIDATED FINANCIAL
INFORMATION (UNAUDITED)
The unaudited pro forma consolidated financial statements have been
prepared to give effect to the Partnership Exchange as if it had taken place on
June 30, 1998 with respect to the unaudited pro forma consolidated balance sheet
and as of January 1, 1997 with respect to the unaudited pro forma consolidated
statements of operations for the year ended December 31, 1997 and the six months
ended June 30, 1998. The unaudited pro forma consolidated financial statements
have also been prepared to give effect to the merger of Bison Energy Corporation
and Shore Oil Company with Middle Bay effective February 28 and June 30, 1997,
respectively, the acquisition of 1,064,032 shares of Enex Resources Corporation,
representing 79.2% of the outstanding shares of Enex Resources Corporation
effective March 27, 1998, and the acquisition of substantially all the assets of
Service Drilling Co., L.L.C. effective April 16, 1998.
The unaudited pro forma adjustments are based upon available financial
information and assumptions that the management of Middle Bay believes are
reasonable. The unaudited pro forma consolidated financial statements included
herein do not purport to represent the financial position or results of
operations which would have occurred had such transactions been consummated on
the dates indicated or Middle Bay's financial position or results of operations
for any future date or period.
The following unaudited pro forma consolidated financial statements
and notes thereto should be read in conjunction with the consolidated financial
statements and related notes of Middle Bay and the Partnership included in this
Prospectus.
- 82 -
<PAGE> 94
MIDDLE BAY OIL COMPANY, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
PRO FORMA
COMBINED PRO FORMA
MIDDLE BAY ADJUSTMENTS COMBINED
------------------ ----------------- -----------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,061,612 - $ 2,061,612
Notes and accounts receivable - trade 3,193,811 - 3,193,811
Other current assets 439,401 - 439,401
Assets held for resale 1,947,135 - 1,947,135
------------------ ----------------- -----------------
Total current assets 7,641,959 - 7,641,959
Notes receivable - Stockholder 169,640 - 169,640
Property, plant and equipment, at cost
Oil and gas properties (successful efforts method) 91,719,370 $ 663,491 (1) 92,382,861
Furniture, fixtures and other 916,524 - 916,524
------------------ ----------------- -----------------
92,635,894 663,491 93,299,385
Accumulated depreciation, depletion and amortization (32,404,946) - (32,404,946)
------------------ ----------------- -----------------
60,230,948 663,491 60,894,439
Other assets 200,115 - 200,115
------------------ ----------------- -----------------
$ 68,242,662 $ 663,491 $ 68,906,153
================== ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturity of long-term debt $ 4,091,535 - $ 4,091,535
Accounts payable and accrued expenses 2,454,476 - 2,454,476
Oil and gas revenue payable 378,632 - 378,632
Other current liabilities 316,308 - 316,308
------------------ ----------------- -----------------
Total current liabilities 7,240,951 - 7,240,951
Long-term debt 26,628,604 - 26,628,604
Deferred income taxes 3,708,668 - 3,708,668
Other liabilities 521,594 - 521,594
Minority Interest 7,034,094 $ (5,841,967)(1) 1,192,127
------------------ ----------------- -----------------
Total liabilities 45,133,911 (5,841,967) 39,291,944
Stockholders' equity:
Convertible preferred stock (Series B) 3,627,000 - 3,627,000
Convertible preferred stock (Series C) - 6,505,458 (1) 6,505,458
Common stock, $.02 par value 171,047 - 171,047
Additional paid-in capital 38,272,126 38,272,126
Accumulated deficit (18,893,382) - (18,893,382)
Less cost of treasury stock; 21,773 shares (68,040) - (68,040)
------------------ ----------------- -----------------
Total stockholders' equity 23,108,751 6,505,458 29,614,209
------------------ ----------------- -----------------
$ 68,242,662 $ 663,491 $ 68,906,153
================== ================= =================
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
- 83 -
<PAGE> 95
MIDDLE BAY OIL COMPANY, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ENEX
MIDDLE BAY BISON & RESOURCES
OIL COMPANY SHORE CORPORATION
------------------ ---------------- -------------------
<S> <C> <C> <C>
Revenues:
Oil and gas sales and plant income $ 10,213,047 $ 2,519,599 $ 10,016,970
Gain on sale of property 7,018 38,241 1,002,326
Other income 1,212,930 787,794 444,303
------------------ ---------------- -------------------
11,432,995 3,345,634 11,463,599
Expenses:
Lease operating and production taxes 3,848,627 932,767 3,983,129
Geological and geophysical costs 222,608 - -
Gas purchases and operating expenses - - 791,403
Depletion, depreciation and amortization 4,567,063 581,614 1,633,771
Impairments 21,147,823 - -
Dry hole and abandonment expense 1,118,838 1,805 -
Interest expense 671,081 160,275 -
Stock compensation expense 202,500 - -
General, administrative and other 2,678,593 603,399 2,061,090
------------------ ---------------- -------------------
34,457,133 2,279,860 8,469,393
Income (loss) before minority interest, income taxes
and investee earnings (23,024,138) 1,065,774 2,994,206
Minority interest - - (1,012,449)
Provision for income taxes (benefit) (7,444,798) 302,114 16,082
Equity in net earnings of equity investees - 36,564 -
------------------ ---------------- -------------------
Net income (loss) (15,579,340) 800,224 1,965,675
Preferred stock dividends 604,712 - -
Net income (loss) applicable to common stock $ (16,184,052) $ 800,224 $ 1,965,675
================== ================ ===================
Income (loss) per share-Basic $ (4.76)
Income (loss) per share-Diluted $ (4.76)
Weighted average common shares outstanding
Basic 3,397,117
Diluted 3,397,117
<CAPTION>
ENEX PRO FORMA
CONSOLIDATED COMBINED PRO FORMA
PARTNERS ADJUSTMENTS COMBINED
----------------- ----------------- ----------------
<S> <C> <C> <C>
Revenues:
Oil and gas sales and plant income $ 2,949,222 3,173,563 (2) $ 28,872,401
Gain on sale of property - - 1,047,585
Other income 1,931 (25,778)(3) 2,421,180
----------------- ----------------- ----------------
2,951,153 3,147,785 32,341,166
Expenses:
Lease operating and production taxes 1,196,792 1,242,373 (2) 11,203,688
Geological and geophysical costs - - 222,608
Gas purchases and operating expenses 17,923 - 809,326
Depletion, depreciation and amortization 679,347 2,700,813 (4) 10,162,608
Impairments - - 21,147,823
Dry hole and abandonment expense - - 1,120,643
Interest expense - 1,350,957 (5) 2,182,313
Stock compensation expense - - 202,500
General, administrative and other 311,250 (21,000)(3) 5,633,332
----------------- ----------------- ----------------
2,205,312 5,273,143 52,684,841
Income (loss) before minority interest, income taxes
and investee earnings 745,841 (2,125,358) (20,343,675)
Minority interest - 1,109,969 (6) 97,520
Provision for income taxes (benefit) - 78,140 (7) (7,048,462)
Equity in net earnings of equity investees - (36,564)(8) -
----------------- ----------------- ----------------
Net income (loss) 745,841 (1,130,094) (13,197,694)
Preferred stock dividends - 823,878 (9) 1,428,590
Net income (loss) applicable to common stock $ 745,841 (1,953,972) $ (14,626,284)
================= ================= ================
Income (loss) per share-Basic $ (2.85) (11)
Income (loss) per share-Diluted $ (2.85) (11)
Weighted average common shares outstanding
Basic 5,139,535 (10)
Diluted 5,139,535 (10)
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
- 84 -
<PAGE> 96
MIDDLE BAY OIL COMPANY, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
ENEX PRO FORMA
MIDDLE BAY RESOURCES COMBINED PRO FORMA
OIL COMPANY CORPORATION ADJUSTMENTS COMBINED
---------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales and plant income $ 7,116,918 $ 2,122,335 $ 725,071 (2) $ 9,964,324
Gain on sale of property 9,068 671,923 - 680,991
Other income 439,008 9,999 - 449,007
---------------- ----------------- ----------------- ----------------
7,564,994 2,804,257 725,071 11,094,322
Expenses:
Lease operating and production taxes 3,605,015 998,654 458,969 (2) 5,062,638
Geological and geophysical costs 788,115 - - 788,115
Gas purchases and operating expenses - 3,997 - 3,997
Depletion, depreciation and amortization 3,024,942 548,028 615,947 (4) 4,188,917
Dry hole expense 307,264 - - 307,264
Interest expense 812,841 - 350,828 (5) 1,163,669
Stock compensation expense 67,500 - - 67,500
General, administrative and other 2,260,553 1,416,407 - 3,676,960
---------------- ----------------- ----------------- ----------------
10,866,230 2,967,086 1,425,744 15,259,060
Income (loss) before minority interest, income taxes
and investee earnings (3,301,236) (162,829) (700,673) (4,164,738)
Minority interest 148,686 (348,190) 440,354 (6) 240,850
Provision for income taxes (benefit) (1,071,867) (86,700) (131,154)(7) (1,289,721)
---------------- ----------------- ----------------- ----------------
Net income (loss) (2,080,683) (424,319) (129,165) (2,634,167)
Preferred stock dividends 67,945 - 325,273 (9) 393,218
Net income (loss) applicable to common stock $ (2,148,628) $ (424,319) $ (454,438) $ (3,027,385)
================ ================= ================= ================
Income (loss) per share-Basic $ (0.28) $ (0.38)(11)
Income (loss) per share-Diluted $ (0.28) $ (0.38)(11)
Weighted average common shares outstanding
Basic 7,625,124 7,975,037 (10)
Diluted 7,625,124 7,975,037 (10)
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
- 85 -
<PAGE> 97
MIDDLE BAY OIL COMPANY, INC.
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND JUNE 30, 1998
NOTE 1. BASIS OF PRESENTATION
The unaudited pro forma consolidated financial statements
reflect the effect of the proposed offer to exchange shares of Series C 10%
convertible preferred stock of Middle Bay for 1,102,631 Partnership Units
representing 100% of the outstanding units of Enex Consolidated Partners, L.P.
(the "Offer"), of which Enex Resources Corporation owns 56.24%. The unaudited
pro forma consolidated financial statements also have been prepared to give
effect to the mergers of Bison Energy Corporation ("Bison") and Shore Oil
Company ("Shore") with Middle Bay effective February 28 and June 30, 1997,
respectively, the acquisition of 1,064,032 shares, or 79.2% of the outstanding
common stock of Enex Resources Corporation effective March 27, 1998, and the
acquisition of substantially all of the assets of Service Drilling Co., L.L.C.
("Service Drilling") effective April 16, 1998. The unaudited pro forma
consolidated financial statements have been prepared to give effect to these
transactions as if they had taken place as of January 1, 1997 with respect to
the unaudited pro forma consolidated statements of operations for the year ended
December 31, 1997 and the six-month period ended June 30, 1998 and to give
effect to the Offer as if it had taken place on June 30, 1998 with respect to
the unaudited pro forma consolidated balance sheet. Each acquisition or merger
was recorded using the purchase method of accounting.
At December 31, 1997, Enex Resources Corporation served as
managing general partner for one limited partnership, Enex Consolidated
Partners, L.P. ("Enex Consolidated Partners" or the "Partnership"). Enex
Resources Corporation has a 4.1% carried revenue interest as the general partner
of Enex Consolidated Partners in addition to its proportional interest as a
limited partner of 55.508%. Enex Consolidated Partners was formed from
thirty-four managed limited partnerships (the "Predecessor Partnerships")
effective June 30, 1997 (the "Consolidation"). For the first six months of 1997,
Enex Resources Corporation served as managing general partner for the
Predecessor Partnerships. Prior to the Consolidation, Enex Resources Corporation
owned greater than 50% of one of the Predecessor Partnerships. Enex Resources
Corporation used pro rata consolidation for those partnerships in which it owned
less than a 50% interest and fully consolidated the partnership in which it
owned greater than 50% interest. Effective June 30, 1997, as a result of the
Consolidation, Enex Resources Corporation owned greater than 50% of the only
partnership it managed. The equity of minority partners in Enex Consolidated
Partners is shown in the historical consolidated financial statements as
"minority interest." From July 1, 1997, the consolidated financial statements of
Enex Resources Corporation include the accounts of Enex Resources Corporation
and its wholly-owned subsidiaries, including Enex Consolidated Partners. Prior
to July 1, 1997, the consolidated financial statements of Enex Resources
Corporation include the accounts of Enex Resources Corporation, its wholly-owned
subsidiaries and its pro rata share of the assets, liabilities, revenues and
expenses of the Predecessor Partnerships.
The unaudited pro forma consolidated balance sheet as of June
30, 1998 includes the historical financial position of Middle Bay Oil Company,
which includes Bison, Shore, Enex Resources Corporation and Service Drilling,
and the pro forma adjustments to give effect to the Partnership exchange as if
it had occurred on June 30, 1998.
- 86 -
<PAGE> 98
The unaudited pro forma consolidated statement of operations
for the year ended December 31, 1997 reflects the following: (i) the historical
consolidated statement of operations of Middle Bay; (ii) the combined historical
statements of operations of Bison and Shore prior to their merger with Middle
Bay; (iii) the historical consolidated statement of operations of Enex Resources
Corporation prior to its acquisition by Middle Bay; (iv) the portion of the
historical statement of operations of the predecessor partnerships for the six
months ended June 30, 1997 which was not pro rata consolidated in the historical
consolidated statement of operations of Enex Resources Corporation for the year
ended December 31, 1997; and (v) the related pro forma adjustments for the Bison
and Shore mergers, the Enex Resources Corporation and Service Drilling
acquisitions and the Partnership exchange. As discussed in (iv), the unaudited
pro forma statement of operations for the year ended December 31, 1997 requires
a separate column to reflect the pro rata results of operations of the
Predecessor Partnerships that are attributable to the limited partners other
than Enex Resources Corporation for the period prior to the June 30, 1997
Consolidation, as such amounts are not included in the consolidated statement of
operations of Enex Resources Corporation for the year ended December 31, 1997.
The unaudited pro forma consolidated statement of operations
for the six months ended June 30, 1998 reflects (i) the historical consolidated
statement of operations of Middle Bay; (ii) the historical consolidated
statement of operations of Enex Resources Corporation for the period ended March
27, 1998, in which the historical consolidated statement of operations of the
Partnership is consolidated for the same period. The historical consolidated
statements of operations of Enex Resources Corporation for the period from March
27, 1998 to June 30, 1998 is included in the historical consolidated statement
of operations of Middle Bay for the six months ended June 30, 1998, as the
acquisition of 79.2% of Enex Resources Corporation closed on March 27, 1998; and
(iii) the related pro forma adjustments for the Partnership exchange and the
Service Drilling acquisition prior to its effective date of April 16, 1998.
NOTE 2. PRO FORMA ENTRIES
Pro Forma Adjustments for the Partnership Exchange
It is anticipated that during November, 1998, the Company will
close an offer to the Partnership whereby it will issue a total of 2,346,000
shares of Middle Bay Series C 10% convertible preferred stock in exchange for
all of the right, title and interest to the units of Partnership interest held
by Investors and Enex Resources Corporation. The number of the shares
outstanding attributable to Investors and the minority interest owners of Enex
Resources Corporation (20.8%) is 1,301,092, representing the 275,225 shares
attributable to the minority interest (20.8%) owners of Enex Resources
Corporation's 56.24% ownership of the Partnership plus the 1,025,867 shares
attributable to the Investors' 43.76% of the Partnership.
Pro Forma Adjustments for the Service Drilling Acquisition
On April 16, 1998, the Company closed an Asset Purchase
Agreement with Service Drilling and certain affiliates, whereby the Company
acquired substantially all of the assets of Service Drilling and its affiliates
in exchange for the Company's common stock and cash. Pursuant to the Agreement,
the Company issued 666,000 shares of its common stock and paid aggregate cash
consideration of $6,500,000, $5,500,000 of which was funded through borrowings
on Middle Bay's revolving line of credit. The acquisition was accounted for as a
purchase of substantially all of the assets of Service Drilling and as a result
of the purchase method of accounting, Middle Bay's cost of acquiring the assets
of Service Drilling was allocated to the assets acquired based on their fair
values.
- 87 -
<PAGE> 99
Pro Forma Adjustments for the Enex Acquisition
On March 27, 1998, in exchange for 79.2% ownership, Middle Bay
acquired 1,064,032 shares of the common stock of Enex for a total purchase price
of $17,061,00, including $15,960,480 or $15 cash per share, assumption of an
additional liability of $789,000 and issuance of 33,825 common shares of the
Company for finders fees, pursuant to Middle Bay's tender offer (the "tender
offer") which began on February 19, 1998. The acquisition was accounted for as a
purchase of 79.2% of Enex and as a result of the purchase method of accounting,
Middle Bay's cost of acquiring the 79.2% of Enex was allocated to the assets and
liabilities acquired based on estimated fair values.
Pro Forma Adjustments for the Bison and Shore Mergers
Middle Bay and Bison entered into a merger agreement whereby
Bison was merged into and continues to exist as a wholly-owned subsidiary of
Middle Bay, effective February 28, 1997.
On June 20, 1997, Middle Bay and Shore entered into a merger
agreement whereby Shore was merged into and continues to exist as a wholly-owned
subsidiary of Middle Bay, effective June 30, 1997.
The mergers were accounted for as purchases of Bison and Shore
by Middle Bay and as a result of the purchase method of accounting, Middle Bay's
cost of acquiring Bison and Shore was allocated to the assets and liabilities
acquired based on estimated fair values.
The accompanying unaudited pro forma combined financial
statements reflect the following adjustments:
(1) To record the exchange of 2,346,000 shares of Middle Bay
Series C 10% convertible preferred stock for the outstanding Partnership Units,
less the 1,044,908 shares owned by Enex Resources Corporation which are not
attributable to the minority interest owners of Enex Resources Corporation
(20.8%), equal to 1,301,092 shares. The allocation of the purchase price to the
acquired assets and liabilities is preliminary and, therefore subject to change.
Any future adjustments to the allocation of the purchase price are not
anticipated to be material to the unaudited pro forma financial statements.
(2) To record the operating income and expenses related to the
oil and gas properties purchased from Service Drilling.
(3) To remove management income and related expenses charged in
accordance with a contractual arrangement whereby Bison performed accounting and
administrative for another entity previously acquired by Middle Bay. Subsequent
to the merger, Bison no longer performed such accounting and administrative
functions under the contract.
- 88 -
<PAGE> 100
(4) To adjust depreciation, depletion and amortization to
reflect Middle Bay's purchase price allocated to the property and equipment
acquired from the Partnership, Service Drilling, Enex Resources Corporation,
Bison and Shore using the unit of production method utilized by Middle Bay.
(5) To record interest expense on the debt incurred as a result
of the Service Drilling and Enex Resources Corporation acquisitions, and, for
the year ended December 31, 1997, to record the reduction of $69,999 in interest
expense on the debt retired in the Shore merger through the issuance of Series A
preferred stock (see note (9)).
(6) To adjust minority interest related to the acquisitions of
the Partnership and Enex Resources Corporation by Middle Bay.
(7) To adjust the provision for income taxes for the change in
taxable income as a result of the acquisitions at assumed effective tax rates of
33% and 35% for the six months ended June 30, 1998 and the year ended December
31, 1997, respectively.
(8) To remove equity in net earnings of equity investees that
were not purchased in the Bison merger.
(9) To record the preferred stock dividends on the 1,301,092
shares of Series C 10% convertible preferred stock issued in connection with the
Partnership Exchange other than 79.2% of the preferred stock dividends of Enex
Resources Corporation which will be eliminated in consolidation of Middle Bay's
financial statements and, for the year ended December 31, 1997, to record the
preferred stock dividends paid on the Series A convertible preferred stock
issued for the cash portion of the Bison merger and issued in connection with
the retirement of debt assumed in the Shore merger.
(10) To reflect the impact on the weighted average common
shares outstanding for the 2,488,889 shares of Middle Bay common stock issued in
conjunction with the Bison and Shore mergers, the 666,000 shares issued in
conjunction with the Service Drilling acquisition and the 33,825 shares issued
in conjunction with the Enex acquisition. Shares issuable upon exercise of
options and upon the conversion of preferred stock are excluded from the
computations of the diluted weighted average common shares outstanding because
their effects would be anti-dilutive.
(11) To reflect the issuance of 2,488,889 shares of Middle Bay
common stock in conjunction with the Bison and Shore mergers, the 666,000 shares
issued in conjunction with the Service Drilling acquisition and the 33,825
shares issued in conjunction with the Enex acquisition. Pro forma basic net
income (loss) per common share information is computed by dividing net income
(loss), applicable to common stock by the pro forma weighted average common
shares outstanding.
- 89 -
<PAGE> 101
BUSINESS OF MIDDLE BAY
Middle Bay Oil Company, Inc. ("Middle Bay" or the "Company") is an
independent oil and gas company engaged in the exploration, development and
production of oil and gas in the contiguous United States. Middle Bay's strategy
focuses on increasing its reserves of crude oil and natural gas by the
acquisition and development of proved oil and gas properties primarily in the
Mid-Continent and Gulf Coast regions. The Company believes the current period
reflects historically low market prices for oil and gas and is focusing its
efforts on increasing reserves so that it will be well positioned to benefit in
the event of any future increases in demand for natural gas and oil. Consistent
with these efforts, the Company is participating on a limited basis in drilling
and development activities in other geographic regions of the contiguous United
States. In November, 1997, Middle Bay relocated its principal executive offices
to 1221 Lamar Street, Suite 1020, Houston, Texas 77010. The Company's mailing
address is P.O. Box 53448, Houston, Texas 77052-3448.
Its telephone number is (713) 759-6808.
Middle Bay's oil and gas reserves are principally in long-lived fields
with well-established production histories. Middle Bay's net Proved Reserves,
estimated as of December 31, 1997 by applying S.E.C. assumptions, consisted of
approximately 18,419 million cubic feet of gas and 2,933 thousand barrels of
oil, with an aggregate present value before income taxes, at a 10% discount, of
$30,179,000. Approximately 80% of the reserves are classified as proved
developed producing, 7% are proved developed non-producing and 13% are proved
undeveloped. On an equivalent barrel basis, the proved reserves are 55% gas.
Recoverable volumes of gas increased 105% and recoverable volumes of oil
increased 111% over 1996 volumes. The PV 10% of the oil and gas reserves
increased 34% over the 1996 amount of $22,465,000. The reserves are located
primarily in Alabama, Kansas, Louisiana, Oklahoma and Texas. A substantial
portion of the Company's natural gas production and Proved Reserves consist of
high BTUgas which, because of its rich liquid content and its proximity to
processing and transmission facilities, is generally sold at a premium to Gulf
Coast and Mid-Continent spot market prices. Substantially all of Middle Bay's
oil production is sold at market responsive prices. All of the Company's gas
production, except for the gas sold in the Spivey Field, is sold at market
responsive prices.
BUSINESS STRATEGY
Middle Bay's present business strategy is to concentrate on expanding
its asset base and cash flow primarily through emphasis on the following
activities:
- Increasing production, cash flow and asset value by acquiring
Producing Properties with stable production rates, long reserve
lives and potential for exploitation and development;
- Building on the Company's existing base of operations by
concentrating its development activities in its primary
operating areas in the Gulf Coast and the Mid-continent
Regions;
- Acquiring additional properties with potential for
developmental drilling to maintain a significant inventory of
undeveloped Prospects and to enhance Middle Bay's foundation
for future growth;
- 90 -
<PAGE> 102
- Serving as operator of its wells to ensure technical
performance and reduce costs;
- Expanding its relationships with major and large independent
oil and gas companies to access their undeveloped properties,
seismic data and financial resources;
- Managing financial risk and mitigating technical risk by:
- drilling in known productive trends with multi-horizon
geologic potential;
- diversifying investment over a large number of wells in
the Company's primary operating areas;
- developing properties that provide a balance between
short and long reserve lives; and
- keeping a balanced reserve profile between oil and gas;
and
- Maintaining low general and administrative expenses and
increasing economies of scale to reduce per unit operating costs
and reserve acquisition costs.
ACQUISITION POLICY
Middle Bay continues to pursue a program of actively acquiring
producing oil and gas properties, with the goal of increasing cash flow,
reserves and value for the long-term benefit of its stockholders.
Middle Bay utilizes an acquisitions' screening approach with its
experienced management and technical staff which reviews potential property
against multiple criteria, both quantitative and subjective. The Company
generally seeks Producing Properties with established production histories.
Middle Bay may operate the property acquired; however, Middle Bay also considers
nonoperated property acquisitions.
In evaluating Producing Properties for potential acquisition,
production history, reservoir characteristics and available geologic data and
interpretations are analyzed to determine estimates of proved and other reserves
and cash flows expected to be recovered. Also evaluated are specific risks and
economic considerations associated with the property, including environmental
liabilities, risks of curtailment, condition of equipment and potential for
additional development opportunities. Sales contracts, operating agreements and
other contractual commitments, including take-or-pay clauses, market-out
clauses, gas balancing agreements, transportation agreements and reversionary
interests that may affect the cash flows from the property are also reviewed.
DRILLING ACTIVITIES
Middle Bay has participated in drilling operations primarily in Texas,
Louisiana and Kansas. The Company's drilling activity increased significantly in
1996 when Middle Bay executed the Brigham Agreement. Middle Bay's drilling is
funded principally from cash flow and is highly dependent on the price of oil
and gas. If the price of oil continues to remain at or near the March, 1998
levels, the amount of funds available for drilling could be reduced.
- 91 -
<PAGE> 103
For the twelve months ended December 31, 1997, Middle Bay drilled 42
gross wells; 23 Development Wells and 19 Exploratory Wells. Seventeen of the
Development Wells and 8 of the Exploratory Wells were successful. The Company's
drilling was concentrated in Kansas, Louisiana and Texas, where 14, 12 and 7
wells were drilled, respectively. The majority of the Kansas wells were
Development Wells drilled in the Spivey Field (the "Spivey Field"). Two
unsuccessful Exploratory Wells were drilled in the Reflection Ridge Prospect in
Stanton County, Kansas. No further exploration is anticipated on the Reflection
Ridge Prospect. For the three months ended March 31, 1997, Middle Bay
participated in the drilling of 12 Exploratory Wells through the Brigham
Agreement. The Brigham Agreement ended March 31, 1997.
Shore Oil Company #1, an Exploratory Well being drilled as of December
31, 1997, was found to be unsuccessful in February, 1998. This Exploratory Well
was drilled on the Raceland Prospect in Lafourche Parish, Louisiana which is
located on the fee mineral acreage acquired in the Shore Merger. Middle Bay had
prepaid approximately $300,000 in drilling cost as of December 31, 1997 and
expensed the costs in the fourth quarter when it was determined that the well
was abandoned.
For the twelve months ended December 31, 1996, Middle Bay drilled 54
wells, 5 Developmental Wells and 49 Exploratory Wells. Four of the Developmental
Wells and 31 of the Exploratory Wells were successful. For the nine months ended
December 31, 1996, Middle Bay participated in the drilling of 49 Exploratory
Wells through the Brigham Agreement. Forty wells were drilled in Texas, seven in
Oklahoma, one in Kansas and one in New Mexico. Middle Bay also participated in
the drilling of four Developmental Wells in the Frymire Waterflood Unit in Nolan
County, Texas, three of which were successful and one of which was a dry hole.
One successful Developmental Well was drilled in the Campbell Field in Major
County, Oklahoma.
Drilling activities during 1997 added 22 thousand barrels of oil and
705 million cubic feet of gas with estimated future net revenues, discounted at
10%, of $851,000. Drilling activities during 1996 added 76 thousand barrels of
oil and 392 million cubic feet of gas with estimated future net revenues,
discounted at 10%, of $1,966,000. For the years 1996 and 1997, oil and gas
reserves discovered through current year drilling accounted for 11% and 3%,
respectively, of the year-end reserve value.
In 1995, Middle Bay entered into a joint development agreement, the
Quarry Prospect, with Chesapeake Operating, Inc. ("COI"). The agreement covers a
600-acre block of leases in Lea County, New Mexico assembled by the Company and
COI. The Quarry Prospect is believed to be a large strawn algal mound that was
initially identified through 2-D seismic and further defined using 3-D seismic
testing. In 1997, the Company acquired additional leases in the prospect and
sold 50% of the Quarry Prospect. Middle Bay and COI together retained 50% of the
Quarry Prospect. If COI elects not to participate, Middle Bay's interest will be
increased to 50%. The first well on the Quarry Prospect is expected to spud in
the second quarter of 1998 and will cost the Company approximately $141,000 to
drill and $66,000 to complete (assuming a 25% working interest).
In July 1997, Middle Bay executed an exploration agreement with Brigham
Exploration Company ("Brigham") for a 3-D seismic exploration project on the
Hawkins Ranch (the "Ranch") in Matagorda County, Texas. The Ranch has been lease
optioned for a 54 square mile 3-D seismic survey. Middle Bay purchased a 25%
working interest through the lease selection phase of the project for $225,000.
- 92 -
<PAGE> 104
Middle Bay purchased a 12.5% working interest in the Sherburne Prospect
in Point Coupee Parish, Louisiana, in October, 1997 (the "Sherburne Prospect").
The Sherburne Prospect consists of approxi-mately 10,000 acres that are
prospective in the Frio, Cockfield, Sparta and Wilcox formations. The acreage is
located in Southwest Point Coupee Parish between Krotz Springs Field and the
Fordoche Field. Production is at depths from 6,500' to 15,500'. Swift Energy
Company has a 62.5% working interest and will be the operator. A private company
holds the remaining 25%. The first well was spud on March 11, 1998 with an
estimated dry hole cost to Middle Bay of approximately $300,000.
In the foreseeable future, Middle Bay's primary drilling focus will be
its participation in the Sherburne Prospect, the Ranch Prospect, the Quarry
Prospect and the development of the Spivey Field. Middle Bay expects to drill
several Development Wells in the Spivey Field in Kansas in 1998. Middle Bay also
expects several wells to be drilled on the Shore mineral acreage in South
Louisiana in 1998. In addition, Middle Bay is continually evaluating Prospects
originated by its staff, other independent geologists or other oil and gas
companies. If review of a certain Prospect indicates that it may be geologically
and economically attractive, then Middle Bay will attempt to obtain a Lease on
the applicable acreage or commit to a Working Interest in the drilling Prospect.
When the Company does participate in a Prospect, it will typically acquire a
fractional Working Interest in the Prospect, which may range from small
percentage interests in more expensive exploratory Prospects to a majority
interest in a lower cost or development Prospect. Middle Bay believes that such
participation, which is common practice in the oil and gas industry, allows for
further diversification and reduction of risk.
ACQUISITIONS AND MERGERS
Since its formation, Middle Bay has grown primarily through
acquisitions of proven oil and gas reserves. For the years 1993 through 1997,
acquisitions of reserves accounted for 64%, 5%, 35%, 34% and 80% of the year-end
discounted reserve value, respectively. Middle Bay has financed its acquisitions
primarily by utilizing its credit facility with the Bank and issuing common and
preferred stock. (See "Middle Bay Financing," below.)
In August 1997, Middle Bay acquired a 5.74% working interest in proved
reserves in the Riceville Field in Vermilion Parish, Louisiana for approximately
$3.5 million. The acquisition was financed with $3 million in loan proceeds and
the remainder from cash on hand. The Riceville Acquisition added approximately
63 thousand barrels of oil and 2,955 million cubic feet of gas to the Company's
proved reserves. A portion of the reserves is proved undeveloped. The Riceville
Acquisition had a PV 10% of approximately $5.3 million, using December 31, 1997
prices.
The Shore Merger in June, 1997 added approximately 965 thousand barrels
of oil and 1,364 million cubic feet of gas to Middle Bay's proved reserves. A
portion of the reserves consists of proven behind pipe and proven undeveloped
reserves. The Shore Merger had a PV 10% of approximately $6.0 million, using
December 31, 1997 prices. The Shore Merger also added approximately 42,000 net
acres of minerals located in South Louisiana, which were valued at $3.6 million
at June 30, 1997.
- 93 -
<PAGE> 105
The Bison Merger in February, 1997 added approximately 951 thousand
barrels of oil and 7,791 million cubic feet of gas to Middle Bay's proved
reserves. A portion of the reserves consists of proven behind pipe and proven
undeveloped reserves. The Bison Merger had a PV 10% of approximately $8.9
million, using December 31, 1997 prices.
The NPC Merger in December, 1996 added approximately 503 thousand
barrels of oil and 3,139 million cubic feet of gas to Middle Bay's proved
reserves. A portion of the reserves consists of proven behind pipe and proven
undeveloped reserves. The NPC Merger had a PV 10% of approximately $6.0 million,
using December 31, 1996 prices.
Middle Bay is currently in the process of evaluating various corporate
acquisitions and potential mergers in exchange for common stock of the Company.
Management believes that corporate acquisitions and mergers are the fastest way
to achieve Middle Bay's growth goals. In addition to achieving what management
perceives to be a proper critical mass, potential corporate acquisitions or
mergers are also considered as opportunities to build a more diverse oil and gas
property base for further development and exploration.
The price of oil has declined significantly since December 31, 1997
and, in March, 1998, reached the lowest level in ten years. The posted price of
WTI crude declined from approximately $15 per barrel on December 31, 1997 to
approximately $13 per barrel on March 16, 1998. If oil prices remain at or near
these levels, the funds available for acquisitions could be reduced.
MIDDLE BAY FINANCING
Middle Bay has financed its acquisitions with debt proceeds from the
Bank, issuance of convertible preferred stock and issuance of common stock.
Middle Bay currently has approximately $11 million borrowed on the $50.0 million
Convertible Loan with the Bank of Oklahoma described under "Business
Development," above. In 1997, Middle Bay issued the remaining $9.0 million in
Series A Preferred Stock through its $10.0 million Preferred Stock Agreement to
finance portions of the Bison and Shore mergers. This completed the funding of
the $10.0 million Preferred Stock Agreement with Kaiser-Francis, which was
signed in September, 1996. In 1997, Middle Bay issued $3.627 million of Series B
Preferred Stock to finance a portion of the Shore Merger. Middle Bay also issued
its common stock in connection with the Bison and Shore mergers. Middle Bay's
drilling activities have been financed primarily through the Company's cash
flow.
Subject to availability of bank financing, Middle Bay will continue to
consider debt-financed acquisitions presented to it. Middle Bay intends to
finance acquisitions by issuing common stock and/or preferred stock when
possible.
COMPETITION, MARKETS AND REGULATION
Competition in the exploration and property acquisition markets is
intense. In seeking to obtain desirable Leases and exploration Prospects, Middle
Bay faces competition from both major and independent oil and gas companies, as
well as from numerous individuals. Many of these competitors have substantial
financial resources available to them, which makes for increased competition.
- 94 -
<PAGE> 106
The ability of Middle Bay to market oil and gas from its wells will
depend upon numerous factors beyond its control, including, but not limited to,
the extent of domestic production and imports of oil and gas, the proximity of
Middle Bay's production to existing pipelines, the availability of capacity in
such pipelines and state and federal regulation of oil and gas production. There
is no assurance that the Company will be able to market all of the oil or gas
produced by it or that favorable prices can be obtained for the oil and gas it
produces. In view of the uncertainties affecting the supply and demand of oil
and gas, Middle Bay is unable to accurately predict future oil and gas prices
and demand, or the overall effect they will have on the Company.
Numerous federal and state laws and regulations affect Middle Bay's
operations. In particular, oil and gas production operations are affected by tax
and other laws relating to the petroleum industry and any changes in such laws
and regulations. Some of the rules and regulations carry substantial penalties
for failing to comply. The regulatory burden on the oil and gas industry
increases the Company's cost of doing business. Middle Bay's activities are also
subject to numerous federal, state and local environmental laws and regulations
governing the discharge of materials. In most cases, the applicable regulatory
requirements relate to water and air pollution control or solid waste management
measures. Middle Bay believes the recent trend toward stricter standards in
environmental legislation, regulation and enforcement will continue. To date,
these laws have not had a significant impact on the Company but no assurance can
be given as to the effect of these laws on the Company in the future.
EMPLOYEES
As of September 30, 1998, Middle Bay employs twenty-seven full-time
persons. Middle Bay employs eleven full-time persons in its Houston, Texas
office, including four executive officers, whose functions are associated with
management, engineering, geology, land and legal, accounting, financial planning
and administration. Middle Bay employs four full-time persons in its Wichita,
Kansas office, including one executive officer, a geologist, an engineer and an
administrative assistant. Middle Bay also employs one full-time supervisor for
well operations in Oklahoma and one full-time accountant in Mobile, Alabama.
PROPERTIES
Real Estate Properties
Middle Bay owns a historic home in Mobile, Alabama which previously
served as its corporate office before the Company's relocation to Houston, Texas
in November 1997. Middle Bay has listed the property for sale.
Oil and Gas Properties
More than 95% of Middle Bay's oil and gas properties, reserves and
activities are located onshore in the continental United States, primarily in
Alabama, Kansas, Louisiana, Oklahoma and Texas. Estimates of total proved net
oil or gas reserves have not been filed with or included in reports to any
federal authority or agency. There are no quantities of oil or gas subject to
long-term supply or similar agreements with foreign governmental authorities.
- 95 -
<PAGE> 107
Middle Bay's largest oil and gas property, in terms of dollar value, is
the Spivey Field acquired in the Bison Merger. The Spivey Field, located in
Kingman and Harper Counties, South Central Kansas, was discovered in 1949.
Development of oil and gas reserves from the Mississippian Chert Formation, at
an average drilling depth of 4,250 feet, has been continual since discovery.
Currently, approximately 585 active wells produce in the field. Great lateral
extent, thick pay sections, and long-lived production characterize the
reservoir.
The Spivey Field has cumulative gas production of over 75,000 million
cubic feet. Gas is marketed to the spot markets and to the Spivey Gas Plant (the
"Plant"). Over 95% of Company gas is sold to the Plant under a life of the lease
casinghead tailgate gas contract. Middle Bay owns approximately 11.5% ownership
in the Plant and related gathering system. Warren Petroleum Company, L.P., and
NGC Corporation jointly operate the Plant. Ownership in the Plant is
redetermined annually, based on owner's throughput relative to total throughput.
Plant liquids (propane, butane and natural gas) are marketed from the Plant to
Murphy Energy. Residue gas is sold to KGE (f/k/a Kansas Power and Light) for a
tailgate price of $2.91 per Mcf. The tailgate contract calls for an annual
escalation of $0.02 per Mcf. The Btu factor for the residue gas is 1.042. Plant
owners also receive the benefit of buying, stripping and reselling "non-owner"
field gas.
The Spivey Field has cumulative oil production of over 66.6 million
barrels of oil. Lease oil is marketed to Koch Oil Company, via truck, and a
bonus above posted prices is received.
Middle Bay operates approximately 80 wells in the Spivey Field from a
field office in Attica, Kansas, staffed by one foreman and two Company pumpers.
All oilfield services are present in the field. Exploration, engineering and
land functions are directed from the division office located in Wichita, Kansas.
Middle Bay is continually developing its acreage position of approximately 8,500
gross acres.
As of December 31, 1997, Middle Bay has identified and independent
engineers have evaluated twenty-two proven undeveloped locations in the Spivey
Field with a PV 10% value of approximately $2.4 million. At December 31, 1997,
the Plant was valued by independent engineers at $2.9 million PV 10%.
The following table shows proved oil and gas reserves by major field
for Middle Bay's largest producing fields at December 31, 1997. The values
represent the present value of estimated future net cash flows before income
taxes, discounted at 10%, assuming unescalated expenses and prices of $16.18/Bbl
and $2.54/MMBtu attributable to proved reserves at December 31, 1997, as
determined by independent petroleum engineers. See "Experts."
- 96 -
<PAGE> 108
<TABLE>
<CAPTION>
Discounted Percentage Oil Gas
Field Name/ Primary Present of Total Reserves Reserves
County/State Operator Value Present Value (Bbls) (Mcf)
------------ -------- ----- ------------- ------ -----
(Dollars/quantities in thousands)
<S> <C> <C> <C> <C> <C>
Spivey Company $9,329 30.9% 993 11,415
Harper/Kingman, KS
Riceville Field Murphy 4,958 16.4% 50 2,244
Vermillion, LA
Hatters Pond Texaco 1,019 3.4% 71 187
Mobile, AL
Wright Field Hilcorp 735 2.4% 96 150
Vermilion, LA
Murphy Lake Amerada Hess 587 1.9% 99 --
St. Martin, LA
Lockhart Crossing Amoco 488 1.6% 10 270
Livingston, LA
Polo Field Lu-Ray 481 1.6% 141 5
Noble, OK
Abbeville Company 473 1.6% 3 279
Vermilion, LA
Okeene N.W. Ricks Expl. 443 1.5% 11 507
Major, OK
N. Frisco City Torch Energy 443 1.5% 33 32
Monroe, AL
Others Various 11,223 37.2% 1,426 3,330
-------- ----- ----- ------
Total $ 30,179 100.0% 2,933 18,419
======== ===== ===== ======
</TABLE>
As of December 31, 1997, the Bank has a first mortgage on all of the
fields listed in the above table. The Bank also has a first mortgage on numerous
additional fields not individually listed above which in total gives the Bank a
first mortgage on approximately 75% of Middle Bay's total reserves (PV 10%) of
$30,179,000 before income tax. Middle Bay is obligated, within five days of
request by the Bank, to grant the Bank a first and prior mortgage on any oil and
gas properties owned or acquired by Middle Bay.
- 97 -
<PAGE> 109
Louisiana Fee Mineral Acreage
In the Shore Merger, Middle Bay acquired approximately 42,321 net
mineral acres, situated in Terrebonne, Lafourche and St. Mary Parishes in
Louisiana. Of the total acreage, 39,769 acres are non-producing and the
remainder is held by production under existing leases. The nonproducing acreage
is located in the following parishes: 20,587 in Terrebonne (Montegut and Houma
areas), 11,128 acres in Lafourche (Raceland and Valentine areas) and 8,054 acres
in St. Mary Parish (Charenton area). The nonproducing acreage currently under
lease and/or option has expiration dates as follows: 17,835 acres in 1998 and
5,722 acres in 2000. As of December 31, 1997, 16,212 acres were not under lease.
Royalty interest in the leases covering the nonproducing minerals ranges from
20% to 25%. The mineral servitude prescription dates are estimated by Middle Bay
to be as follows: 620 acres prescribed in 1997, 6,226 acres in 1999, 5,286 acres
in 2002, 4,145 acres in 2004, 1,121 acres in 2005, 1,145 acres held in
perpetuity and the remaining acreage has prescription interrupted by production.
Effective April 1, 1992, Shore Oil Company sold the production rights under
tracts producing at that time and does not receive royalty income from the sale
of oil or gas on those tracts. Over 80% of the nonproducing minerals have been
covered by 3-D seismic shot by third parties and provided to Middle Bay at no
cost. During the period July 1, 1997 through December 31, 1997, Middle Bay
received approximately $975,000 in lease bonus, delay rental and seismic option
income on the acreage. An independent oil and gas engineering firm valued the
acreage as of June 30, 1997 at $3,627,000. One unsuccessful Exploratory Well in
Lafourche Parish, the Shore Oil Company #1, was drilled on the fee mineral
acreage in 1997 and abandoned in February, 1998.
Productive Wells and Acreage
The following table depicts the number of gross and net producing wells
and related Developed and Undeveloped Acreage in which Middle Bay owned an
interest for the period ended December 31, 1997 Undeveloped Acreage is oil and
gas acreage (including, in certain instances, rights in one or more horizons
which may be penetrated by existing well bores, but which have not been tested)
to which Proved Reserves have not been assigned by independent petroleum
engineers.
Middle Bay's net Developed Acreage is located primarily in Oklahoma,
Texas, Alabama, New Mexico and Kansas. Middle Bay's net Undeveloped Acreage is
located in Kansas.
<TABLE>
<CAPTION>
Acreage
------------------------------------
Developed Undeveloped
--------- -----------
<S> <C> <C>
Gross Acres 239,646 9,758
Net Acres 20,337 8,643
<CAPTION>
Productive Wells
---------------------------------
Oil Gas
--- ---
<S> <C> <C>
Gross Wells 797.00 184.00
Net Wells 68.67 30.13
</TABLE>
- 98 -
<PAGE> 110
Excluded from the acreage data are approximately 44,041 net mineral
acres owned by Middle Bay, all of which are considered to have potential for oil
and gas exploration.
Production, Prices and Costs
Below is a summary of the net production of oil and gas, average sales
prices and average production costs during each of the last three fiscal years.
Middle Bay is not obligated to provide a fixed and determined quantity of oil
and gas in the future under existing contracts or agreements. During the last
three fiscal years, the Company has not had, nor does it now have, any long-term
supply or similar agreements with governments or authorities.
<TABLE>
<CAPTION>
Fiscal Years Ended December 31,
-----------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Crude Oil and Natural Gas Production:
Oil (Bbls) 107,025 108,626 253,849
Gas (Mcf) 916,954 982,709 1,929,298
Average Sales Prices:
Oil (per Bbl) $ 16.17 $ 20.26 $ 18.38
Gas (per Mcf) $ 1.52 $ 2.28 $ 2.39
Average Production Costs Per BOE(1) $ 5.25 $ 5.36 $ 6.69
</TABLE>
(1) The components of production costs may vary substantially among wells,
depending on the methods of recovery employed and other factors, but
generally include severance taxes, administrative overhead, maintenance
and repair, labor and utilities.
Drilling Activities
During the periods indicated, Middle Bay drilled or participated in the
drilling of the following productive and nonproductive Exploratory and
Development Wells. All of Middle Bay's drilling and production activities are
conducted with independent contractors.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Exploratory Wells:
Productive
Gross 0 31 8
Net 0 0.987 0.452
Dry
Gross 0 18 11
Net 0 0.675 1.280
Development Wells:
Productive
Gross 0 4 17
Net 0 0.866 5.627
Dry
Gross 2 1 6
Net 0.418 0.250 4.150
Total Wells:
Productive
Gross 0 35 25
Net 0 1.853 6.079
Dry
Gross 2 19 17
Net 0.418 0.925 5.430
</TABLE>
- 99 -
<PAGE> 111
As of March 16, 1998, Middle Bay was drilling one Exploratory Well on the
Sherburne Prospect.
Reserves
Note 11 to Middle Bay's financial statements presents, among other
disclosures prepared pursuant to Statement of Financial Accounting Standards No.
69, the estimated net quantities of Middle Bay's proved oil and gas reserves and
the standardized measure of discounted future net cash flows attributable to
such reserves as of December 31, 1997. At December 31, 1997, Middle Bay's net
Proved Reserves consisted of 2,933 thousand barrels of oil and 18,419 million
cubic feet of gas, and net Proved Developed Reserves consisted of 2,580 thousand
barrels of oil and 14,251 million cubic feet of gas. At December 31, 1997, the
present value discounted at 10% for Middle Bay's Proved oil and gas reserves,
before income taxes, was approximately $30,179,000. (See Note 11 to Middle Bay's
financial statements for additional detail on the Company's oil and gas
reserves.) Management of Middle Bay, however, cautions against using this data
to determine the fair value of the Company's oil and gas properties or for any
other purpose because the price of oil and gas can be volatile. The present
value was computed using December 31, 1997 base oil prices of $16.18 per Bbl and
base gas prices of $2.54 per MMBtu. Base prices were adjusted for certain
properties that either received a price above or below the base price. There
were no estimates or reserve reports of Middle Bay's proved oil and gas reserves
filed with any governmental authority or agency during the year ended December
31, 1997.
The following table sets forth the standardized measure (in thousands
of dollars) of future net cash flows of Proved Reserves and total recoverable
volumes of oil and gas from Proved Reserves attributable to Middle Bay's
interest in oil and gas wells for the years ended December 31, 1997 through
1995:
- 100 -
<PAGE> 112
<TABLE>
<CAPTION>
Recoverable Volumes
-------------------
Standardized Oil Gas
Year Ended Measure (MBbls) (MMcf)
---------- ------- ------- ------
<S> <C> <C> <C>
December 31, 1997 $24,493 2,933 18,419
December 31, 1996 $17,863 1,389 8,964
December 31, 1995 $ 9,250 778 6,371
</TABLE>
The increases in the standardized measure from 1995 to 1996 and 1996 to
1997 are due primarily to the NPC Merger in 1996 and the Bison and Shore Mergers
and Riceville Acquisition in 1997. For a detail of changes in oil and gas
reserves for the year, refer to Note 11 to Middle Bay's financial statements.
PRO FORMA RESERVES AND PROPERTIES
The following table provides information regarding Middle Bay's pro
forma reserves and properties as of and for the year ended December 31, 1997,
assuming consummation of the Exchange:
<TABLE>
<CAPTION>
As of and for the
Year Ended
December 31, 1997
-----------------
<S> <C>
PRO FORMA PROVED RESERVES
Oil (Barrels) 4,233,556
Natural gas (Mcf) 33,334,559
Standardized measure of discounted future
net cash flow(1) $44,672,969
PRO FORMA PRODUCTION
Oil (Barrels) 531,078
Natural gas (Mcf) 3,665,002
PRO FORMA SALES PRICE
Oil ($/Barrel) $ 17.76
Natural gas ($/Mcf) $ 2.44
PRO FORMA LIFTING COST
Per equivalent barrel of production ($/BOE) $ 6.80
PRO FORMA PRODUCTIVE WELLS Oil Natural Gas
--- -----------
Gross 11,942 1,331
Net 149 84
PRO FORMA AVERAGE Developed Undeveloped
--------- -----------
Gross 590,331 16,087
Net 35,365 12,250
</TABLE>
- 101 -
<PAGE> 113
(1) The Standardized Measure of Discounted Future Net Cash Flows prepared
by the Company represents the present value of future net revenues
after income taxes discounted at 10%.
The reserve data set forth herein represents only estimates. Reserve
engineering is a subjective process of estimating underground accumulations of
crude oil and natural gas that cannot be measured in an exact manner. The
accuracy of any reserve estimate is a function of the quality of available data
and of engineering and geological interpretation and adjustment. As a result,
estimates of different engineers often vary. In addition, results of drilling,
testing and production subsequent to the date of an estimate may justify
revisions of such estimates. Accordingly, reserve estimates often differ from
the quantities of crude oil and natural gas that are ultimately recovered.
Estimates of economically recoverable oil and natural gas reserves and of future
net revenues are based upon a number of variables and assumptions, including
future prices of oil and gas, all of which may vary considerably from actual
results. The reliability of such estimates is highly dependent upon the accuracy
of the assumptions from which they were based.
LEGAL PROCEEDINGS
Middle Bay is a defendant in various legal proceedings which are
considered routine litigation incidental to the Company's business, the
disposition of which management believes will not have a material effect on the
financial position or result of operations of Middle Bay.
CORPORATE GOVERNANCE OF MIDDLE BAY
The Middle Bay Board of Directors has the responsibility for
establishing broad corporate policies and for the overall performance of the
Company, taking into consideration the interests of all shareholders. Members of
the Board are kept informed of the Company's business by various reports sent or
communicated to them regularly, as well as by operating and financial reports
made at Board and Committee meetings by the President and other officers. During
1997, the full Board met three times. The Board has two Committees, an Audit
Committee and a Compensation Committee. The Audit Committee met one time, and
the Compensation Committee met twice.
The Audit Committee's duties include recommending to the Board the
selection of a firm of independent public accountants for approval by the
shareholders at their Annual Meeting. In addition, the Committee confers with
Middle Bay's independent public accountants to review the plan and scope of
their proposed audit, as well as their findings and recommendations upon the
completion of the audit. The Committee meets with the independent public
accountants and with appropriate Company financial personnel regarding the
Company's internal controls and financial policies. The Audit Committee
currently consists of Gary R. Christopher, Frank E. Bolling, Jr. and Alvin V.
Shoemaker. No member of the Audit Committee is an officer or employee of Middle
Bay.
The Compensation Committee is responsible for establishing and
reviewing policies governing executive salaries, bonus and incentive
compensation and the terms and conditions of employment of executives of Middle
Bay. In addition, the Committee is responsible for the oversight of the
Company's 1995 Stock
- 102 -
<PAGE> 114
Option and Stock Appreciation Rights Plan and similar or other plans which may
be maintained from time to time by the Company and has authority to grant
options and awards under Middle Bay's 1995 Stock Option and Stock Appreciation
Rights Plan, and oversees the Company's SEP/IRA retirement plan, the net profits
interest incentive compensation plan established by Middle Bay in 1995 and the
40l(k) plan established in 1997 (see "Corporate Governance of Middle Bay -
Executive Compensation"). The Committee coordinates with the appropriate
financial, legal and administrative personnel of Middle Bay, as well as outside
experts retained in connection with the administration of these plans. The
Compensation Committee currently consists of John J. Bassett, President and
Chief Executive Officer, and Messrs. Edward P. Turner, Jr. and Frank E. Bolling,
Jr., neither of whom is an officer or employee of Middle Bay.
During 1997, all incumbent directors attended all of the meetings of
the Board of Directors. Attendance at those meetings was 100%. Attendance at the
Committee meetings was 100%.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the present
directors and executive officers of Middle Bay. All directors serve for a
one-year term or until the annual meeting of shareholders of the Company held
following their election:
<TABLE>
<CAPTION>
Director
Name Age Position(s) Held Since
---- --- ---------------- -----
<S> <C> <C> <C>
John J. Bassett 39 Chairman, President and 1992
Chief Executive Officer
C. J. Lett, III 40 Executive Vice President 1997
and Director
Stephen W. Herod(1) 38 Vice President and Director 1997
Edward P. Turner, Jr. 68 Director 1992
Frank E. Bolling, Jr. 38 Director 1992
Alvin V. Shoemaker (2) 59 Director 1997
Gary R. Christopher 48 Director 1997
</TABLE>
(1) Mr. Herod replaced Frank C. Turner, II effective July 3, 1997.
(2) Mr. Shoemaker replaced C. Noell Rather effective July 28, 1997.
John J. Bassett has served as President and a director of the
Company since 1992 and was elected Chairman of the Board of Directors in 1992.
He served as President of the general partner of the Predecessor Partnership
from 1987 to 1992. He also serves as a director and President of Bay City Energy
Group, Inc., a principal shareholder of the Company.
- 103 -
<PAGE> 115
C. J. Lett, III has served as Executive Vice President for the
Company since February 28, 1997. Mr. Lett is also President and a director of
Bison Energy Corporation, a position he has held since 1981.
Stephen W. Herod has served as Vice President - Corporate
Development and a director of the Company since July 1, 1997. Mr. Herod served
as President and a director of Shore Oil Company from April, 1992 until the
merger of Shore and the Company on June 30, 1997. He joined Shore's predecessor
as Controller in February, 1991. In addition, Mr. Herod was employed by Conquest
Exploration Company from 1984 until 1991 in various financial management
positions, including Operations Accounting Manager. From 1981 to 1984, Mr. Herod
was employed by Superior Oil Company as a financial analyst.
Edward P. Turner, Jr. served as President of Bay City Minerals,
Inc. from 1975 to 1987. He is a member of the Alabama State Bar, and for more
than 25 years he has served as a managing partner of the law firm of Turner,
Onderdonk, Kimbrough & Howell, P.A., in Chatom, Alabama. A substantial amount of
his practice is devoted to oil and gas law. Mr. Turner also serves as a director
of Bay City Energy Group, Inc.
Frank E. Bolling, Jr. has been employed by Midstream Fuel
Services, Inc. as Vice President of Retail Operations since February, 1995.
Prior to his employment with Midstream, Mr. Bolling served as Vice President and
General Manager of Dantzler Bulk Plant, Inc., a distributor for Chevron U.S.A.,
Inc. with annual sales in excess of $25 million. Mr. Bolling served as sales
manager for Dantzler from 1987 to 1989. Prior to 1987, Mr. Bolling was employed
by Bay City Minerals, Inc.
Alvin V. Shoemaker is a former Chairman of the Board of First
Boston Corporation and former President of Blyth Eastman Paine Webber. He has
also worked for the U.S. Treasury. He has been Chairman of the Board of Trustees
of the University of Pennsylvania, Vice Chairman of the Securities Industry
Association and a director of Harcourt Brace Jovanovich, Royal Insurance of
America, the Council on Foreign Relations and the Wharton School of Finance
Board. Mr. Shoemaker is also a director of Hanover Compressor Company.
Gary R. Christopher is Acquisitions Coordinator of Kaiser-Francis
Oil Company, a position he has held since February, 1996. From 1991 to 1996, Mr.
Christopher served as Senior Vice President and Manager of Energy Lending for
the Bank of Oklahoma. He continues to serve as a consultant to the Bank of
Oklahoma. Kaiser-Francis Oil Company owns 3,333,334 shares of Middle Bay's
common stock.
COMPENSATION OF DIRECTORS
Each director is paid an attendance fee of $500 for each meeting of the
Board and of each Committee of the Board, and Middle Bay reimburses directors'
documented travel and lodging expenses.
Each nonemployee director is eligible for incentive awards under the
1995 Stock Option and Stock Appreciation Rights Plan. In January, 1998, the
Board of Directors approved the Compensation Committee's recommendation to issue
nonqualified stock options pursuant to the Plan to nonemployee directors, as
follows (see "Executive Compensation"):
- 104 -
<PAGE> 116
<TABLE>
<CAPTION>
No. of Exercise
Name Optioned Shares Price
---- --------------- -----
<S> <C> <C>
Edward P. Turner, Jr. 10,000 $5.75
Frank E. Bolling, Jr. 10,000 $5.75
Gary R. Christopher 10,000 $5.75
Alvin V. Shoemaker 10,000 $5.75
</TABLE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth the shares of Middle Bay's common and
preferred stock beneficially owned by those persons known by the Company to be
the beneficial owner of more than five percent of Middle Bay's issued and
outstanding common and preferred stock as of December 31, 1997:
<TABLE>
<CAPTION>
Title of Name and Address of Amount and Nature of Percent of
Class Beneficial Owner Beneficial Ownership Class
----- ---------------- -------------------- -----
<S> <C> <C> <C>
Common C. J. Lett, III(1) 1,197,556 13.8%
9320 East Central
Wichita, Kansas 67206
Common Kaiser-Francis Oil Company(1) 3,333,334 38.3%
6733 South Yale
Tulsa, Oklahoma 74136
Common Weskids, L.P.(2) 843,687 10.0%
310 South Street
Morristown, NJ 07960
Common Weskids, Inc. 843,687 10.0%
310 South Street
Morristown, NJ 07960
Common Alvin V. Shoemaker(1) 661,222 8.9%
8800 First Avenue
Stone Harbor,NJ 08247
Series B Weskids, L.P.(2) 117,467 44.1%
Preferred 310 South Street
Morristown, NJ 07960
Series B Weskids, Inc. 117,467 44.1%
Preferred 310 South Street
Morristown, NJ 07960
Series B Alvin V. Shoemaker(1) 117,466 44.1%
Preferred 8800 First Avenue
Stone Harbor, NJ 08247
Series B Stephen W. Herod(1) 15,867 5.9%
Preferred 1110 Briar Ridge Drive
Houston, TX 77057
Series B W. Tim Sexton(1) 15,867 5.9%
Preferred 12010 Winwood
Houston, TX 77024
</TABLE>
- 105 -
<PAGE> 117
(1) The nature of the beneficial ownership is sole voting and investment power.
(2) Weskids, L.P. is presently the beneficial owner and has sole voting and
disposition power of 843,687 shares of common stock and 117,467 shares of
Series B Preferred immediately convertible into not less than 117,467 shares
of the Company's common stock. The exact conversion ratio is determined by
the terms of the Shore Merger. Weskids, Inc. is the general partner of
Weskids, L.P. and effectively controls Weskids, L.P. The officers and
directors of Weskids, Inc. are as follows: J. Peter Simon, director; William
Edward Simon, Jr., director; Michael B. Lenard, President; Mark J. Butler,
Vice President/Treasurer; and Christine W. Jenkins, Secretary.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the shares of Middle Bay's common stock
beneficially owned by each director and executive officer and all directors and
executive officers as a group, all as of September 30, 1998:
<TABLE>
<CAPTION>
Conv. Preferred Common Name and Address of Amount and Nature of Percent of
& Options Stock Beneficial Owner Beneficial Ownership(6) Class
--------- ----- ---------------- -------------------- -----
<S> <C> <C> <C> <C>
152,000 24,711 John J. Bassett 176,711 2.0%
4326 Noble Oak Trail
Houston, TX 77059
94,500 21,296 Frank C. Turner, II 115,796 1.4%
1406 Tallow Court
Seabrook, TX 77586
114,500 6,996 Robert W. Hammons 121,496 1.4%
915 Kentbury Court
Katy, TX 77450
8,000 5,000 Lynn M. Davis 13,000 0.1%
121 Donna Circle
Daphne, AL 36526
</TABLE>
- 106 -
<PAGE> 118
<TABLE>
<S> <C> <C> <C> <C>
34,734 376,241 Edward P. Turner, Jr.(1) 410,975 4.7%
100 Central Avenue
Chatom, AL 36518
15,000 1,182,556 C. J. Lett, III(2) 1,197,556 13.8%
9320 East Central
Wichita, KS 67206
34,734 -- Frank E. Bolling, Jr. 34,734 0.4%
3830 Kendale Drive
Gautier, MS 39553
-- 12,000 Gary R Christopher(3) 12,000 0.1%
6733 South Yale
Tulsa, OK 74136
117,466 661,222 Alvin V. Shoemaker(4) 778,688 8.9%
8800 First Avenue
Stone Harbor, NJ 08247
15,867 109,816 Stephen W. Herod(5) 125,683 1.4%
1110 Briar Ridge Drive
Houston, TX 77057
All executive officers and
directors as a group
(10 persons) 2,991,139 34.3%
</TABLE>
(1) Includes 362,803 shares owned by Bay City Energy Group, Inc. in which
Mr. Turner has indirect voting control but not a direct beneficial
interest, and 13,438 shares over which Mr. Turner has sole voting and
dispositive power.
(2) Mr. Lett was named Executive Vice President of Middle Bay on February
28, 1997 in connection with the Bison Merger (see "Certain Relationships
and Related Transactions").
(3) Mr. Christopher is an officer of Kaiser-Francis Oil Company which is the
beneficial owner of 3,333,334 of Middle Bay's common shares.
(4) Consists of 117,466 shares of Series B Preferred Stock convertible into
117,466 common shares of Middle Bay (see "Certain Relationships and
Related Transactions").
(5) Consists of 15,867 shares of Series B Preferred Stock convertible into
15,867 common shares of Middle Bay. Mr. Herod was named Vice President -
Corporate Development and a director of Middle Bay in connection with
the Shore Merger (see "Certain Relationships and Related Transactions").
(6) The nature of beneficial ownership for all shares is sole voting and
investment power.
- 107 -
<PAGE> 119
CHANGES IN CONTROL
There are no arrangements known to management which may result in a
change in control of Middle Bay.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the aggregate cash compensation earned
by and paid to Middle Bay's executive officers for the periods ended December
31, 1995 through December 31, 1997:
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
----------------------------------------- ----------------------
Awards Payouts
------ -------
Securities
Underlying
Restr. Options/ All Other
Name and Other Annual Stock SARs LTIP Compensation
Principal Position Year Salary ($) Bonus ($) Compensation Awards($) (#) Payouts ($) ($)
------------------ ---- ---------- --------- ------------ --------- --- ----------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John J. Bassett 1997 95,521 6,001 -- 129,545 132,000 -- 13,032
President & 1996 58,075 -- -- -- 20,000 -- 2,271
Chief Executive 1995 56,250 -- -- -- -- -- 11,371
Officer
Frank C. Turner, II 1997 85,729 6,000 -- 57,960 94,500 -- 16,250
Vice President & 1996 54,458 -- -- -- 20,000 -- 2,174
CFO 1995 50,083 -- -- -- -- -- 10,775
Robert W. Hammons 1997 85,729 6,000 -- 57,960 94,500 -- 12,500
Vice President - 1996 58,075 -- -- -- 20,000 -- 2,271
Engineering 1995 56,250 -- -- -- -- -- 11,360
</TABLE>
Compensation Under Plans
Middle Bay established a SEP/IRA retirement plan (the "Plan") in 1993
which allows for a maximum discretionary Company contribution of 15% of total
wages paid to employees for the year. For the years ended December, 1997 through
1995, Middle Bay contributed a total of $51,500, $5,000 and $30,000,
respectively, to the Plan, including $32,064, 3,068 and $18,505 for all
executive officers as a group since the Plan's inception.
Middle Bay established a 401(k) plan in October, 1997, which allows for
voluntary contributions by the employees and the employer. No Company
contributions were made in 1997.
In March, 1995, the Board of Directors adopted an employee incentive
compensation plan whereby the proceeds equivalent to 1% net profits interest
(the "net profits interest") in all oil and gas properties, drilling prospects
and acquisitions and divestitures acquired or made after January 1, 1994 are
paid into a fund for incentive compensation awards to eligible employees.
- 108 -
<PAGE> 120
The net profits interest on property acquisitions and drilling
prospects are calculated on the monthly gross profit which is defined as
revenues from oil and gas sales, less direct operating expenses, attributable to
the Company's working or royalty interest in an individual property. Direct
operating expenses include landowner's royalty, overriding royalty and all costs
of production, equipment, operating expenses and taxes. On drilling prospects,
the net profits interest will not include costs of drilling, testing and
completing the well, the costs of acreage and costs of geological or geophysical
work. For divestitures, the net profits interest will be calculated on the gross
sales price, less any direct costs of the sale of an individual property.
To qualify for an award as an "eligible employee," as presently
established by the Compensation Committee, an employee must be employed by
Middle Bay on October 1 and December 31 of the calendar year and have been
recommended by the Compensation Committee to receive an award. For the years
ended December 31, 1996 and 1995, Middle Bay paid $6,916 and $30,000,
respectively, to employees through the employee incentive plan, including $4,897
and $21,245 for all executive officers as a group. No amount was paid into the
employee incentive plan in 1997.
Middle Bay has no other retirement, pension/profit-sharing or other
deferred compensation.
Option Grants in Last Fiscal Year
The 1995 Stock Option and Stock Appreciation Rights Plan (the "Plan")
is administered by the Compensation Committee (the "Committee") of the Board of
Directors. At least two members of the Committee must be disinterested
nonemployee directors. The Committee is authorized to determine the employees,
including officers, to whom options or rights are granted. Each option or right
granted shall be on such terms and conditions consistent with the Plan as the
Committee may determine, but the duration of any option or right shall be not
greater than ten years or less than five years from the date of grant.
Options or rights grants shall be made under the Plan only to persons
who are officers or salaried employees of Middle Bay or are nonemployee
directors. The aggregate number of shares of common stock of the Company which
could be subject to options or rights under the Plan during 1997 was 500,000.
During the fiscal year ended December 31, 1997, options covering 295,000 shares
were issued under the Plan.
The option price of shares covered by options granted under the Plan
may not be less than the fair market value at the time the option is granted.
The option price must be paid in full in cash or cash equivalent at the time of
purchase or prior to delivery of the shares in accordance with cash payment
arrangements acceptable to the Committee. If the Committee so determines, the
option price may also be paid in shares of the Company's common stock already
owned by the optionee. The Committee has discretion to determine the time or
times when options become exercisable, within the limits set forth in the Plan.
All options and rights granted under the Plan will, however, become fully
exercisable if there is a change in control (as defined in the Plan) of Middle
Bay.
- 109 -
<PAGE> 121
The following table provides certain information with respect to all
options granted during the fiscal year ended December 31, 1997 to any executive
officer or director of Middle Bay; 295,000 options were granted under the Plan
and 225,000 were granted outside of the Plan:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
Number of
Securities % of Total
Underlying Options/SARs
Options/ Granted to
SARS Employees in Exercise or Base Expiration
Name Granted (#) Fiscal Year Price ($/Sh) Date
---- ----------- ----------- ------------ ----
<S> <C> <C> <C> <C>
John J. Bassett 100,000 19.0% 5.50 2/13/2007
32,000 6.0% 6.00 2/6/2007
Frank C. Turner, II 62,500 12.0% 5.50 2/13/2007
32,000 6.0% 6.00 2/6/2007
Robert W. Hammons 62,500 12.0% 5.50 2/13/2007
32,000 6.0% 6.00 2/6/2007
Lynn M. Davis 8,000 2.0% 6.00 2/6/2007
Edward P. Turner, Jr.* 21,400 4.0% 6.00 2/6/2007
Frank E. Bolling, Jr.* 21,400 4.0% 6.00 2/6/2007
C. Noell Rather** 21,200 4.0% 6.00 2/6/2007
</TABLE>
*Nonemployee director
**Former nonemployee director
Aggregated Option Exercises in Last Fiscal Year and
Option Value Table as of December 31, 1997
The following table sets forth certain information concerning each
exercise of stock options during the year ended December 31, 1997, by each of
the named executive officers and directors and the aggregated fiscal year-end
value of the unexercised options of each such named executive officer and
director:
- 110 -
<PAGE> 122
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs at Options/SARs at
Shares FY End (#) FY End ($)
Acquired Value ----------------------- -----------------------
Name on Exercise (#) Realized ($) Exer. Unexer. Exer. Unexer.
---- --------------- ------------ ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
John J. Bassett -- -- -- 152,000 -- 728,000
Frank C. Turner, II 20,000 115,000 20,000 94,500 150,000 409,250
Robert W. Hammons -- -- -- 114,500 -- 559,250
Lynn M. Davis 5,000 38,750 -- 8,000 37,500 32,000
Edward P. Turner, Jr.* -- -- -- 34,734 -- 185,600
Frank E. Bolling, Jr.* -- -- -- 34,733 -- 185,600
</TABLE>
*Nonemployee director
EMPLOYMENT AGREEMENTS
Mr. Bassett and Mr. Hammons in January, 1997, signed employment
agreements with Middle Bay which extend through January 31, 2002 and January 31,
2000, respectively, with automatic one-year extensions upon each anniversary
date of the employment agreement thereafter unless either party gives at least
30 days' notice of termination. Each employment agreement is terminable by
Middle Bay before expiration of the term if such termination is for cause (as
specified in the employment agreement). The executive employment agreements
provide for an annual salary of not less than the base salaries of $95,000 and
$85,000, respectively, which amounts may be adjusted from time to time by the
Board of Directors upon the recommendation of the Compensation Committee. They
also provide for fringe benefits in accordance with the Company's policies
adopted from time to time for salaried executive employees holding comparable
positions.
Mr. Herod executed an employment agreement with Middle Bay with an
effective date of July 1, 1997 and extending through June 30, 1999, with
automatic one-year extensions upon each anniversary date of the employment
agreement thereafter unless either party gives at least 30 days' notice of
termination. The employment agreement is terminable by the Company before
expiration of the term if such termination is for cause (as specified in the
employment agreement). The executive employment agreement provides for an annual
salary of not less than the base salary of $100,000, which amount may be
adjusted from time to time by the Board of Directors upon the recommendation of
the Compensation Committee. It also provides for fringe benefits in accordance
with Middle Bay's policies adopted from time to time for salaried executive
employees holding comparable positions.
- 111 -
<PAGE> 123
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires Middle
Bay's directors and executive officers and any persons who own more than 10% of
Middle Bay's common stock to file with the Securities and Exchange Commission
reports of ownership and changes in ownership of such securities. Based on
representations from such persons, Middle Bay believes that there was no failure
to file or delinquent filings under Section 16(a) of the Securities Exchange Act
of 1934 by any officer, director or beneficial owner of 10% or more of Middle
Bay's common stock during 1997.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Edward P. Turner, Jr., a director of Middle Bay, is managing partner of
the law firm of Turner, Onderdonk, Kimbrough & Howell, P.A., the Company's
general counsel for certain corporate and oil and gas matters. For the years
ended December 31, 1995 through 1997, Middle Bay paid legal fees to Mr. Turner's
firm of $787, $1,560 and $2,874, respectively, for legal services. Mr. Turner's
firm charges the Company for its services on the same basis as it charges other
business clients for similar services rendered. Middle Bay intends to continue
to use Mr. Turner's firm as its primary local counsel in Alabama and will pay
reasonable fees for such future services.
Bay City Energy Group, Inc., is presently indebted to Middle Bay in the
amount of $166,165 ($139,005 of principal and $27,160 of accrued interest). The
note payable was renegotiated on December 31, 1995 and is due in full on January
1, 2001, plus interest at an annual fixed rate of 5%. The note payable is
secured by 75,000 shares of Middle Bay's common stock. Edward P. Turner, Jr., a
director of Middle Bay, has indirect voting control but not a beneficial
interest in Bay City Energy Group, Inc.
On September 4, 1996, Middle Bay signed a stock purchase agreement with
Kaiser Francis Oil Company ("the Preferred Stock Agreement"). Kaiser-Francis
agreed to purchase 1,666,667 shares of Series A Preferred Stock ("Series A
Preferred") at $6.00 per share, for a total investment of $10,000,000. The
Series A Preferred is nonvoting and accrues dividends at 8% per annum, payable
quarterly in cash. The Series A Preferred is convertible at any time after
issuance into shares of common stock at the rate of two shares of common stock
for each share of Series A Preferred before January 1, 1998. The conversion rate
decreases thereafter at 8% per annum. On January 31, 1998, Kaiser-Francis
converted all 1,666,667 Series A Preferred shares it held into 3,333,334 shares
of Middle Bay's common stock. Prior to such conversion, Kaiser-Francis owned
none of the issued and outstanding common shares. Subsequent to the conversion,
Kaiser-Francis' shares represent 42.57% of the issued and outstanding shares of
common stock. Gary R. Christopher, a director of Middle Bay, serves as
Acquisitions Coordinator of Kaiser-Francis Oil Company.
In December, 1996, Middle Bay entered into an Agreement and Plan of
Merger (the "NPC Merger") with NPC Energy Corporation ("NPC"). Pursuant to the
Merger, Middle Bay issued 562,000 shares of its common stock and paid $1,226,400
to certain of NPC's shareholders. Series A Preferred Stock in the amount of $1.0
million under the Preferred Stock Agreement was sold to finance the cash portion
of the purchase price.
- 112 -
<PAGE> 124
In February, 1997, Middle Bay entered into an Agreement and Plan of
Merger (the "Bison Merger") with Bison Energy Corporation ("Bison"), whereby
Bison was merged with a wholly-owned subsidiary of the Company in exchange
Middle Bay common stock and cash. Pursuant to the Bison Merger, Middle Bay
issued 1,167,556 shares of its common stock and net cash consideration of
$5,900,000 to C. J. Lett, III in exchange for all of the stock of Bison. 562,000
shares of Middle Bay common stock owned by Bison (as a result of the NPC Merger)
were canceled at closing. Mr. Lett became Executive Vice President of Middle Bay
on February 28, 1997 and is a director of the Company.
On June 20, 1997, Middle Bay entered into an Agreement and Plan of
Merger (the "Shore Merger") with Shore Oil Company ("Shore"), whereby Shore was
merged with a wholly-owned subsidiary of Middle Bay in exchange for Middle Bay
common stock, Series B Preferred Stock (the "Series B Preferred"), cash and the
assumption of Shore debt. Shore was privately held principally by Weskids, L.P.
and Alvin V. Shoemaker. Shore's assets consist of oil and gas properties located
primarily in Alabama, Louisiana, Mississippi and Texas, as well as approximately
42,000 net mineral acres in LaFourche, Terrebonne and St. Mary Parishes, South
Louisiana. Pursuant to the Shore Merger, Middle Bay issued 1,883,333 shares of
its common stock, paid Shore's indebtedness to its shareholders of $2,333,303
and assumed bank debt of $2,105,000. In addition, Middle Bay paid $200,000 in
cash and issued 266,667 shares of Series B Preferred which are convertible into
as many as 1,333,333 shares of common stock over the next five years, contingent
upon the results of drilling and leasing activity on Shore's Louisiana mineral
acreage. In connection with the merger, Messrs. Shoemaker and Herod were
appointed as directors, replacing Frank C. Turner and C. Noell Rather. Mr. Herod
was also appointed as Vice President - Corporate Development.
BUSINESS OF THE PARTNERSHIP
GENERAL
Enex Consolidated Partners, L.P. (the "Partnership") was formed under
the New Jersey Uniform Limited Partnership Law (1976) on June 30, 1997 from the
combination of thirty-four Enex Oil and Gas Limited Partnerships, consisting of
Enex Program I Partners, L.P., four partnerships in Enex Oil & Gas Income
Program II, the eight partnerships in Enex Oil & Gas Income Program III, six
partnerships in Enex Oil & Gas Income Program IV, the five partnerships in Enex
Oil & Gas Income Program V, Enex Oil & Gas Income Program VI - Series 1, L.P.,
the three partnerships in Enex Income and Retirement Fund, three partnerships in
Enex 88-89 Income and Retirement Fund, and the three partnerships in Enex 90-91
Income and Retirement Fund (collectively the "Predecessor Partnerships").
The historical information presented herein consists of the cumulative
historical totals of the Predecessor Partnerships for the year ended December
31, 1996 and for the six months ended June 30, 1997. The amounts for the six
months ended December 31, 1997 are the result of the operations of the
Partnership.
The Partnership is engaged in the oil and gas business through the
ownership of various interests in producing oil and gas properties, as detailed
below. If warranted, the Partnership may further develop its oil and gas
properties. However, the Partnership does not intend to engage in significant
drilling activities. Such
- 113 -
<PAGE> 125
activities may be conducted, however, as an incidental part of the management of
producing properties or with a view toward enhancing the value of producing
properties. In no event will the Partnership engage in exploratory drilling, or
use any of the limited partners' net revenues to fund exploratory drilling
activities. Any developmental drilling will be financed primarily through third
party borrowings or with funds provided from operations. The expenses of
drilling, completing and equipping and operating development wells are allocated
96% to the limited partners and 4% to the general partner. See Note 1 to the
Financial Statements for information relating to the allocation of costs and
revenues between the limited partners and the general partner, Enex Resources
Corporation ("Enex"). The Partnership's operations are concentrated in a single
industry segment.
The Partnership owns royalty interests in certain oil and gas
properties. A "royalty interest" is an interest retained by the lessor in the
lease and payable out of 100% of proceeds before deducting any other interests.
The Partnership also owns overriding royalty interests in certain oil and gas
properties. An "overriding royalty interest" is an interest in a property which
was carved out of the working interest that is not subject to most operating
costs associated with the property. The Partnership also owns working interests
in certain oil and gas properties. A "working interest" is a portion of the
operating interest which is subject to most of the costs associated with a well.
The principal executive office of the Partnership is maintained at
Suite 200, Three Kingwood Place, Kingwood, Texas 77339. The telephone number at
this office is (281) 358-8401. The Partnership has no regional offices.
The Partnership has no employees. On September 30, 1998, Enex employed
six persons.
MARKETING
The marketing of oil and gas produced by the Partnership is affected by
a number of factors which are beyond the Partnership's control, the exact nature
of which cannot be accurately predicted. These factors include the quantity and
price of crude oil imports, fluctuating supply and demand, pipeline and other
transportation facilities, the marketing of competitive fuels, state and federal
regulation of oil and gas production and distribution and other matters
affecting the availability of a ready market. All of these factors are extremely
volatile.
Gulfmark Inc. accounted for 11% of the Partnership's total sales in
1997. No other purchaser individually accounted for more than 10% of such sales.
The operators of the Partnership's major properties are noted below.
Although a significant portion of the Partnership's properties were operated by
a limited number of operators, this concentration does not pose a significant
risk since the Partnership's rights are secured by joint operating agreements.
- 114 -
<PAGE> 126
ENVIRONMENTAL AND CONSERVATION REGULATION
State regulatory authorities in the states in which the Partnership
owns producing properties are empowered to make and enforce regulations to
prevent waste of oil and gas and to protect correlative rights and opportunities
to produce oil and gas for owners of a common reservoir. Each of such regulatory
authorities also regulates the amount of oil and gas produced by assigning
allowable rates of production, which may be increased or decreased in accordance
with supply and demand. Requirements regarding the prevention and clean-up of
pollution and similar environmental matters are also generally applicable. The
costs, if any, the Partnership may incur in this regard cannot be predicted.
The existence of such regulations has had no material adverse effects
on the Partnership's operations to date, and the cost of compliance has not yet
been material. There are no material administrative or judicial proceedings
arising under such laws or regulations pending against the Partnership. The
Partnership is unable to assess or predict the impact that compliance with
environmental and pollution control laws and regulations may have on its future
operations, capital expenditures, earnings or competitive position.
TAX LAWS
The operations of the Partnership are affected by the federal income
tax laws contained in the Internal Revenue Code of 1986, as amended (the
"Code"). Under the Code, generally, the Partnership will report income from the
sale of oil and gas, against which it may deduct its ordinary business expenses,
depletion, depreciation and intangible drilling and development costs.
It is anticipated that most of the Partnership's income, if any, will
be from a "passive activity" for purposes of the Code. A passive activity
includes an activity in which the taxpayer does not materially participate,
including the ownership of a limited partnership interest such as an interest in
the Partnership. "Passive income," however, does not include portfolio income
(i.e. dividend, interest, royalties, etc.). Although taxpayers generally may not
deduct losses or use tax credits derived from passive activities in an amount
greater than their income derived from such activities, if and to the extent
that the Partnership generates passive income, it will be available to offset
the limited partners' passive losses from other sources.
Partnerships with interests that are "publicly traded" are taxed as
corporations unless at least 90% of their income is "qualifying income." Passive
income or loss from publicly traded partnerships that are not taxed as
corporations generally cannot be applied against passive income or loss from
other sources. As stated in Item 5 of the Partnership's Annual Report, there is
no established public trading market for the Partnership's limited partnership
interests. In addition, the Partnership derives more than 90% of its income from
oil and gas activities, which constitutes qualifying income from oil and gas
activities, which constitutes qualifying income within the meaning of section
7704(d) of the Code. Therefore, the Partnership should not be affected by the
publicly traded partnership rules.
In order to prevent the adverse tax consequences that would affect the
limited partners if the Partnership's limited partnership interests were to
become publicly traded in the future, the General Partner may, after final
regulations have been issued by the Internal Revenue Service, submit to a vote
of limited
- 115 -
<PAGE> 127
partners a proposal to amend the Partnership's Agreement of Limited Partnership
to provide, among other things, (a) that Enex shall have the right to refuse to
recognize any transfer of limited partnership interests if it believes that such
transfer occurred on a secondary market or the substantial equivalent thereof;
and (b) that all assignors and assignees of the limited partnership interests
shall be required to represent to Enex that any transfer of limited partnership
interests did not, to the best of their knowledge, occur on a secondary market
or the substantial equivalent thereof.
PROPERTIES
On June 30, 1997, the Predecessor Partnerships transferred all of their
assets to the Partnership, subject to corresponding liabilities. These
properties continue to be operated by the Partnership as they were operated by
the Predecessor Partnerships. Presented below is a brief description of the
Partnership's major property holdings, all of which were transferred to it by
the Predecessor Partnerships.
Concord. The Concord acquisition consists of working interest
and royalty interest in more than 10,600 wells in 137 counties in Texas, with
very minor interests in 12 other states.
H.N.G. The H.N.G. acquisition began with the purchase of
overriding royalty interests in over 300 gas wells in Texas, New Mexico, and
Oklahoma and culminated five transactions later with the last purchase of
overriding royalty interests in these properties. The H.N.G. acquisition is
operated by eight different oil and gas companies. The Partnership owns working
interests ranging from .104% to 8.999% in the H.N.G. acquisition at December 31,
1997.
East Seven Sisters. The East Seven Sisters acquisition was
comprised of six transactions in which parts of a mineral interest and the
associated royalty interest in the Gorman Gas Unit in the East Seven Sisters
Field, Duval County, Texas were acquired. The East Seven Sisters acquisition is
operated by Vastar Resources Inc. The Partnership owns a 9.81% royalty interest
in the East Seven Sisters acquisition at December 31, 1997.
The Partnership has thirty additional acquisitions which were
transferred from the Predecessor Partnerships. In total, the Partnership has
interests in 11,118 oil well properties and 1,078 gas well properties which are
primarily located in Texas, Oklahoma and Louisiana.
OIL AND GAS RESERVES
For quantitative information regarding the Partnership's oil and gas
reserves, please see Supplementary Oil and Gas Information and related tables
which follow the Notes to Financial Statements of Enex Consolidated Partners,
L.P. The Partnership has not filed any current oil and gas reserve estimates or
included any such estimates in reports to any federal or foreign governmental
authority or agency, including the Securities and Exchange Commission.
Proved oil and gas reserves reported herein are based on engineering
reports prepared by the petroleum engineering consulting firm of H. J. Gruy and
Associates, Inc. The reserves included in this report are
- 116 -
<PAGE> 128
estimates only and should not be construed as exact quantities. Future
conditions may affect recovery of estimated reserves and revenue, and all
reserves may be subject to revision as more performance data become available.
The proved reserves used in this report conform to the applicable definitions
promulgated by the Securities and Exchange Commission. No major discovery or
other favorable or adverse event that could potentially cause a significant
change in the estimated proved reserves has occurred since December 31, 1997.
NET OIL AND GAS PRODUCTION
The following table shows for the years ended December 31, 1997 and
1996, the approximate production attributable to the Predecessor Partnerships'
and the Partnership's oil, gas, and gas plant product interests. The figures in
the table represent "net production," i.e., production owned by the Predecessor
Partnerships and the Partnership and produced to their interest after deducting
royalty and other similar interests. All production occurred in the United
States.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Crude oil and condensate (Bbls) 323,231 368,484
Natural gas (Mcf) 1,765,438 1,865,875
Natural gas liquids (Bbls) 33,019 34,316
Natural gas - gas plant sales (Mcf) 220,193 232,825
</TABLE>
The following table sets forth the Predecessor Partnerships' and the
Partnership's average sales price per barrel of oil, per Mcf of gas, and average
production cost per equivalent barrel of production for the years ended December
31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Average sales price per barrel of oil $ 17.72 $ 19.40
Average sales price per Mcf of gas 2.51 2.29
Average production cost per equivalent
barrel of production 6.73 6.27
Average sales price per barrel of natural
gas liquids(1) 12.16 13.34
Average sales price per Mcf of gas plant
gas sales(1) 2.73 1.96
Average production cost per equivalent
barrel of gas plant production(1)(2) 11.61 9.06
</TABLE>
(1) Natural gas liquid production was obtained through gas processing plant
ownership rather than through leasehold ownership.
(2) Includes cost of gas purchases.
- 117 -
<PAGE> 129
LEGAL PROCEEDINGS
A Predecessor Partnership was named as a party to a suit filed by Texas
Crude, Inc. ("Texas Crude"). In the suit, Texas Crude sought to recover legal
and other fees totaling $600,000. In August 1993, a judgement was granted in
favor of Texas Crude for $414,203 plus interest by the 101st Judicial District
Court of Texas. The Partnership recognized a contingent liability at December
31, 1993 for $504,350.
The Partnership appealed the verdict and filed a counterclaim for funds
that were wrongfully withheld by Texas Crude. In December 1994, the Fifth
District Court of Appeals reversed the judgement of the trial court and rendered
judgement in favor of the Partnership, in which the Partnership will recover
$163,019 from Texas Crude plus interest. Accordingly, the contingent liability,
initially recognized in 1993, was reversed in December 1994 and a receivable for
$254,588 was established in 1994.
Both the Partnership and Texas Crude have filed Motions for Rehearing,
which have been pending for more than a year. The accrued receivable balance at
December 31, 1997 was $338,860.
There are no other material pending legal proceedings to which the
Partnership is a party or to which any of their properties are subject.
MARKET FOR COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS
There is no established public trading market for the Partnership's
outstanding Units.
NUMBER OF EQUITY SECURITY HOLDERS
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class (as of September 30, 1998)
-------------- --------------------------
<S> <C>
General Partner's Interests 1
Limited Partnership Interests 10,360
</TABLE>
DISTRIBUTIONS
The Partnership and its Predecessor Partnerships made cash
distributions to limited partners of $4,593,955 and $2,464,947 in 1997 and 1996,
respectively, and through October, 1998, cash distributions have been
$3,068,166. This equated to $4.17 and $2.24 per Unit in 1997 and 1996,
respectively, and $2.78 per Unit in 1998 through October. The payment of future
distributions will depend on the Partnership's earnings, financial condition,
working capital requirements and other factors, although it is anticipated that
regular quarterly distributions will continue through 1998.
- 118 -
<PAGE> 130
LEGAL MATTERS
The validity of the issuance of the securities to be issued pursuant to
the Exchange Offer will be passed upon for Middle Bay and certain federal income
tax matters relating to the Exchange Offer will be passed upon for Middle Bay by
Thrasher, Whitley, Hampton & Morgan, Atlanta, Georgia.
DESCRIPTION OF MIDDLE BAY EQUITY SECURITIES
Middle Bay's Articles of Incorporation authorize 20,000,000 shares of
common stock, $0.02 par value per share, and 10,000,000 shares of preferred
stock, $0.02 par value per share.
COMMON STOCK
As of September 30, 1998, there were 8,530,592 shares of common stock
outstanding, held by approximately 1,000 registered holders.
In all matters to come before the shareholders, holders of common stock
have one vote per share. Holders of common stock are not entitled to cumulative
votes, which means that the holders of a majority of the total voting power of
such shares can elect all of the directors entitled to be elected by the holders
of common stock. In the event of liquidation of the Company, the holders of
common stock are entitled to receive, on a pro-rata basis, all of the assets
then legally available for distribution, subject to any preferential rights of
the holders of preferred stock.
The holders of common stock are entitled to dividends and other
distributions as and when declared by the Board of Directors out of assets
legally available therefor, subject to any preferential dividend rights of the
holders of any preferred stock which may be outstanding or issued in the future
or any credit agreements or other contracts restricting payment of dividends.
The shares of common stock are not subject to redemption, and the holders of the
common stock have no preemptive or subscription rights. The issued and
outstanding shares of common stock are fully paid and nonassessable.
PREFERRED STOCK
As of September 30, 1998, there were 266,667 shares of preferred stock
which have been designated Series B Preferred by the Board of Directors, of
which 266,667 shares were issued in connection with the Shore Merger (see
"Certain Relationships and Related Transactions") and are presently outstanding;
and there are 2,346,400 shares of preferred stock which have been designated as
Series C Preferred, none of which are presently issued and outstanding, but
which are expected to be issued in connection with the Exchange. The 1,666,667
Series A Preferred shares which were issued and outstanding in 1997 were
converted into 3,333,334 shares of common stock of Middle Bay on January 31,
1998 (see "Certain Relationships and Related Transactions"). The Series B
Preferred shares are nonvoting but are convertible into as many as 1,333,333
shares of common stock, contingent upon the results of drilling and leasing
activity on mineral acreage in South Louisiana acquired in the Shore Merger.
Additional shares of authorized preferred stock may be issued from time to time
by the Board of Directors in one or more series, with each series having such
designation rights (including voting rights or the absence thereof) and
preferences as may be determined by the directors.
- 119 -
<PAGE> 131
The Series C Preferred is generally nonvoting; however, holders of
Series C Preferred are entitled to a vote on any amendment, alteration or repeal
of any provisions of Middle Bay's Articles of Incorporation adversely affecting
their rights and preferences as preferred stockholders; provided, however, that
the issuance by Middle Bay of additional series of preferred stock will not be
deemed to adversely affect the rights and preferences of the holders of Series C
Preferred, so long as any such series of preferred stock ranks junior to or on a
parity with the Series C Preferred. The Middle Bay Articles of Incorporation
provide that, so long as any shares of Series C Preferred are outstanding,
Middle Bay shall not issue any class or series of stock which would entitle the
holders thereof to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference or
priority to the holders of Series C Preferred shares. The Series B Preferred
shares rank in parity with the Series C Preferred shares with regard to
preferences upon liquidation, dissolution or winding up of Middle Bay.
At any time from and after the Effective Date, the holders of Series C
Preferred shares will have the right to convert each share of Series C Preferred
into one share of Middle Bay common stock (as such conversion rate may be
adjusted as a result of any dividend, subdivision or combination of Middle Bay
common stock).
The holders of Series C Preferred shares are also entitled to receive
cumulative cash dividends in an amount per share of $.50 per annum, payable
semi-annually on March 31st and September 30th of each year (measured by the
fiscal year of Middle Bay). No dividends may be authorized or paid or set apart
for payment or other distribution of cash or other property authorized or made
directly or indirectly by Middle Bay with respect to any shares of Middle Bay
common stock or other junior securities of Middle Bay unless the full cumulative
dividends on all outstanding shares of Series C Preferred shall have been paid
or such dividends have been authorized and set apart for payment with respect to
the Series C Preferred shares.
Prior to January 1, 2000, shares of Series C Preferred will not be
subject to redemption by Middle Bay. On and after January 1, 2000, Middle Bay
may redeem all or a portion of the Series C Preferred, at its option, at a
purchase price of $5.00 per share, plus an amount equal to all accumulated,
accrued and unpaid dividends, if any, to the date of redemption, subject to the
holders' rights to convert. If Middle Bay elects to redeem all or a portion of
the shares of Series C Preferred, it is required by the Articles of
Incorporation to select the date on which such redemption will occur (the "Call
Date") and must give notice to all holders of Series C Preferred shares of
record not less than 30 days nor more than 60 days prior to the Call Date of (a)
the Call Date, (b) the number of shares to be redeemed and, if fewer than all
shares held by such holder are to be redeemed, the pro-rata number of shares to
be redeemed from such holder, (c) the place or places at which certificates for
such shares are to be surrendered for certificates representing shares of Middle
Bay common stock, (d) the then-current conversion rate, and (e) the fact that
dividends on the shares of Series C Preferred to be redeemed will cease to
accrue on the Call Date (except as otherwise provided in the Articles of
Incorporation). The Call Date may not be less than 30 days nor more than 60 days
after the date such notice of redemption is sent by Middle Bay. If fewer than
all the outstanding shares of Series C Preferred are to be redeemed on any Call
Date, shares to be redeemed will be selected by Middle Bay (i) by lot, (ii) pro
rata or (iii) by any other method
- 120 -
<PAGE> 132
as may be determined by the Board of Directors in its discretion to be
equitable. A notice of redemption will be sent by first class mail to the
address of each holder of Series C Preferred shares, as the same appears on the
stock records of Middle Bay, and may, in conjunction with such mailing, be
published in The Wall Street Journal or the Houston, Texas Chronicle. Subject to
applicable escheat laws, any cash set aside by Middle Bay to so redeem shares of
Series C Preferred that is unclaimed at the end of two years from the Call Date
will revert to the general funds of Middle Bay, after which time the holders of
shares called for redemption will be entitled to payment of such cash only from
the general funds of Middle Bay.
In the event of a liquidation, dissolution or winding up of Middle Bay,
holders of Series C Preferred shares will have the right to liquidation
preferences in the amount of $5.00 per share held, plus an amount equal to all
dividends accumulated, accrued and unpaid thereon to the date of final
distributions to such holders, before any payment will be made to holders of
Middle Bay common stock or other junior securities of Middle Bay. The
liquidation preferences of the Series C Preferred shares rank on a parity with
the presently issued and outstanding Series B Preferred shares.
The shares of Series C Preferred to be issued in connection with the
Middle Bay Exchange Offer and all shares of Middle Bay common stock issuable
upon conversion of the Series C Preferred, when so issued, will be fully paid
and nonassessable.
Application has been made by Middle Bay requesting that the Series C
Preferred shares be approved for listing on the NASDAQ Small Cap Stock Market,
subject to official notification of issuance.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
As of September 30, 1998, there are 11,447,636 unissued shares of
common stock and 9,733,333 shares of preferred stock authorized under Middle
Bay's Articles of Incorporation for future issuance without shareholder
approval. 1,500,000 of these additional shares of common stock have been
reserved for possible exercise of stock options described under "Compensation
Under Plans," and 2,346,400 shares have been reserved for the possible
conversion of the Series C Preferred shares issuable pursuant to the Exchange.
The remaining additional shares of common or preferred stock may be used for a
variety of corporate purposes, including possible future public or private
offerings to raise additional capital, to facilitate corporate acquisitions or
for executive incentive compensation.
One of the effects of the existence of unissued and unreserved common
stock and preferred stock may be to enable the Board of Directors to issue
shares to persons friendly to current management, which could render more
difficult or discourage an attempt to obtain control of Middle Bay by means of a
merger, tender offer, proxy contest or otherwise, and thereby protect the
continuity of Middle Bay's management. Such additional shares also could be used
to dilute the stock ownership of persons seeking to obtain control of Middle
Bay.
- 121 -
<PAGE> 133
The Board of Directors is authorized, without any action by the
shareholders, to determine the rights, preferences, privileges and restrictions
of the unissued preferred stock. The purpose of authorizing the Board of
Directors to determine such rights and preferences is to eliminate delays
associated with a shareholder vote on specific issuances. The Board of Directors
may issue preferred stock with voting and conversion rights which could
adversely affect the voting power of the holders of Middle Bay common stock and
which could, among other things, have the effect of delaying, deferring or
preventing a change in control of Middle Bay.
Management of Middle Bay does not have any current plans to issue
additional shares of common or preferred stock, other than the shares of Series
C Preferred which would be issuable in connection with the Exchange.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for Middle Bay common stock and
preferred stock is OTC Stock Transfer, Inc., Salt Lake City, Utah.
INDEMNIFICATION OF MIDDLE BAY'S DIRECTORS AND OFFICERS
The Alabama Business Corporation Act provides in Section 10-2A-75,
generally, that a director shall perform his duties as a director in good faith,
in a manner he reasonably believes to be in the best interests of the
corporation, and with such care as an ordinarily prudent person in a like
position would use under similar circumstances.
Middle Bay's Articles of Incorporation provide that the corporation
shall indemnify each director, as well as each officer, employee or agent, to
the fullest extent permitted by Alabama law. Section 10-2A-21 of the Alabama
Business Corporation Code provides for full indemnification against liability,
including attorney's fees and costs, for such persons so long as the person
acted in good faith reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
Articles of Incorporation empower Middle Bay to purchase and maintain insurance
for its officers, directors, employees and agents to insure against liabilities
asserted against or incurred by any of them in such capacities arising out of
one's status as such, but no such insurance has been provided by Middle Bay and
none is presently contemplated.
- 122 -
<PAGE> 134
COMPARATIVE RIGHTS OF SECURITY HOLDERS
The following comparative information is an accurate summary of the
material differences associated with rights of a holder of Units in the
Partnership versus stockholders in Middle Bay.
THE PARTNERSHIP
MIDDLE BAY
Distributions and Dividends
The Partnership Agreement provides for cash distributions in the discretion of
the General Partner in an amount equal to approximately the difference between
revenues allocated to the respective part ners and costs charged to the
partners. The Partnership Agreement states that the provisions do not serve as
a limitation on the right of the General Partner to retain, pledge or use so
much of the revenues or other assets of the Partnership to conduct additional
operations, establish reserves for anticipated expenditures or repay any amounts
borrowed by the Partnership to finance the conduct of such operations.
Holders of Convertible Series C Preferred shall receive dividends equal to 10%
of the $5.00 stated value of each share held.
Under Alabama law, dividends may be paid out of the company's surplus or out of
its net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. Although holders of common stock are entitled to receive
any dividends declared thereon by Middle Bay's Board of Directors out of
legally available funds, no dividends are expected to be paid on the common
stock for the foreseeable future. In addition, Middle Bay's credit agreements
restrict its ability to pay cash dividends to holders of common stock.
Tax Matters
The Partnership is not subject to federal or state income taxes. Each partner is
allocated his pro-rata share of the Partnership's taxable income.
Middle Bay is subject to federal income tax on its consolidated income after
allowable deductions and credits. Stockholders will not be taxed on Middle Bay's
income, but will generally be subject to federal and state income taxes on any
dividends received from the Company.
- 123 -
<PAGE> 135
Voting Rights
Holders of Units in the Partnership are entitled to one vote per Unit on matters
submitted to them for a vote, on any sale of all or substantially all of the
assets, dissolution of the Partnership and removal of the General Partner. Each
of these matters requires the consent of a majority of the outstanding units.
Holders of Series C Preferred are entitled to one vote per share on all matters
submitted to them for a vote, including all matters which affect the rights to
dividends and conversion of such Preferred Shares. Preferred shareholders shall
generally not have the right to vote on issues affecting the management or
operation of Middle Bay, including the election and removal of directors and
amendments to the Articles of Incorporation not directly affecting the rights of
holders of Series C Preferred. Accordingly, the holders of Units will receive a
security with significantly different voting rights, including the elimination
of the right to compel dissolution. Additionally, former holders of Units will
own a smaller percentage interest in Middle Bay than they currently own in the
Partnership, resulting in a corresponding decrease in their voting power.
Holders of common stock of Middle Bay are entitled to one vote per share on all
matters submitted to them for a vote, including the election and removal of
directors, amendments to the Articles of Incorporation, certain mergers and
share exchanges, dissolution and the sale of all or substantially all of the
assets of Middle Bay. These matters require the approval of a majority of the
outstanding common stock.
Right to Call Meetings
Meetings of the partners of the Partnership may be called by the General Partner
or by holders of at least 10% of the outstanding Units. Actions requiring a
vote of the holders of Units may be taken without a meeting upon written consent
by the same percentage of Unitholders required to approve the action at a
meeting.
Special meetings of Middle Bay's stockholders may be called by the President,
Board of Directors or by holders of not less than 10% of those shares entitled
to vote at such meeting. Actions requiring a vote may be taken without a meeting
upon written consent by all stockholders.
Right to Investor List
Under New Jersey law and the Partnership Agreement, a holder of Units has the
right to examine or copy a listing of the names and addresses and record
ownership positions of the holders of Units.
Middle Bay is required to maintain a list of the names and addresses of all
stockholders at its principal office during normal hours for any proper purpose
and, in certain circumstances, to provide a copy of the list to any stockholder
upon request.
- 124 -
<PAGE> 136
Assessments and Limited Liability
Under the terms of the Partnership Agreement, Unitholders are not subject to
additional assessments. The liability of the Unitholders is generally limited to
their capital contributions and, in certain circumstances, the amount of any
capital distributed or returned to them.
Middle Bay's stockholders will not be subject to assessments or to personal
liability for obligations of the Company.
Associations and Dilution
Under the terms of the Partnership Agreement, the Unitholders pay 95.89% of all
costs of the Partner ship, while the General Partner pays 4.11% of such costs.
Middle Bay's Articles of Incorporation authorize the issuance of up to
20,000,000 shares of common stock and 10,000,000 shares of preferred stock,
including shares that may be divided into one or more additional series with
rights and preferences to be determined by the Board of Directors without any
stockholder action. An investor's percentage interest in Middle Bay is subject
to dilution upon issuance of additional securities by the Company.
Liquidity
There is no trading market for the Units.
There is currently no trading market for the Series C Preferred shares.
Application has been made by Middle Bay for listing the Series C Preferred on
the NASDAQ Small Cap Stock Market, subject to approval; however, there is no
assurance a trading market will develop.
Middle Bay's common stock is currently traded on the NASDAQ Small Cap Market,
and the shares issued pursuant to this Exchange Offer will be freely traded by
nonaffiliates of the Company.
- 125 -
<PAGE> 137
Redemption and Conversion
The Units are not redeemable or convertible into other securities.
Middle Bay Series C Preferred are each convertible into one share of common
stock. Series C Preferred are redeemable by Middle Bay for $5.00 per share (plus
accrued dividends) at any time after December 31, 1999.
Middle Bay common stock is not redeemable or convertible.
Financial Reporting
The Partnership is subject to the reporting requirements of the Exchange Act
and files periodic reports with the SEC, copies or summaries of which are
provided to its Unitholders.
Middle Bay is subject to the reporting requirements of the Exchange Act and
files periodic reports, as well as proxy statements, with the SEC, copies or
summaries of which are provided to its stockholders.
Operating Strategy
The Partnership was formed in 1997 as a consolidation of 34 oil and gas limited
partnerships. The Partnership owns various interests in producing oil and gas
properties located primarily in Texas, Oklahoma and Louisiana. The Partnership
does not intend to engage or participate in any significant drilling activities,
and exploratory drilling is prohibited. Although the Partnership Agreement
permits the General Partner to borrow money on behalf of the Partnership, the
General Partner's policy has been to refrain from financing oil and gas
activities through credit.
Middle Bay is primarily engaged in the exploration, development and production
of oil and gas properties in the contiguous United States. Middle Bay's
operations are focused primarily in the Mid-Continent and Gulf Coast regions.
Middle Bay's general business strategy is to seek new reserves in areas of low
geologic risk and to exploit under developed existing oil and gas properties.
Since the Company has substantial undeveloped properties, drilling and
development of those properties necessarily entail greater risks than the
Partnership's producing properties represent. Middle Bay has, and will continue
to, finance a portion of its oil and gas property acquisition through the
issuance of equity securities or under credit arrangements with banks.
Management and Compensation
Enex is the General Partner of the Partnership and, as such, makes all decisions
regarding the business and operations of the Partnership, including production,
development and other activities and any sale of properties. The General Partner
does not receive any management fee or other fees from the Partnership. The
Partnership reimburses the General Partner for operating expenses, well costs
and general and administrative expenses incurred on behalf of the Partnership.
The common stockholders of Middle Bay elect directors annually, and the
directors elect officers of the Company to serve at the discretion of the Board.
Officer salaries and incentive compensation are determined annually by the
Compensation Committee of the Board of Directors of Middle Bay.
Holders of Serie C Preferred are not generally entitled to elect directors or
participate in nonextraordinary corporate decisions.
- 126 -
<PAGE> 138
Fiduciary Duties
The General Partner's fiduciary duties to Unitholders include legal
responsibilities of loyalty, care and good faith. Enex may not profit from
drilling for itself or on behalf of the Partnership in contravention of its
fiduciary obligation to the partners.
The fiduciary duties owed by the directors to its stockholders under the Alabama
Business Corporation Act and remedies available for a breach of those
responsibilities are similar to those applicable to the Partnership and
Unitholders. Therefore, the Exchange generally will not involve any reduction in
the standard of care owed to investors or in the remedies available for any
breach of those duties. Moreover, the elimination of the dual role of the Board
of Directors as the governing body of Middle Bay with its obligations to
stockholders, as well as obligations and duties owed to Unitholders as the
General Partner, should remove most of the conflicts of interest inherent in the
current structure.
Limits on Management's Liability
The Partnership Agreement provides that in any threatened, pending or completed
action, suit or proceeding to which the General Partner was or is a party or is
threatened to be made a party by reason of the fact that it was or is General
Partner of the Partnership involving any alleged cause of action for damages or
other activities relative to management and disposition of oil and gas
properties or production from such properties, the Partnership will indemnify
the General Partner against expenses actually and reasonably incurred by it in
connection with such action, suit or proceeding if it acted in good faith and in
a manner it reasonably believed to be in or not opposed to the best interests of
the Partnership, and provided that its conduct does not constitute negligence,
misconduct or a breach of its fiduciary obligations to Unitholders.
Middle Bay's Articles of Incorporation and Bylaws provide for the
indemnification of directors, officers and agents to the full extent permitted
by the Alabama Business Corporation Act. These provisions generally provide for
indemnification in the absence of gross negligence or willful misconduct and
cannot be amended without the affirmative vote of a majority of the outstanding
shares of common stock.
Continuation of Existence
The Partnership Agreement provides for a term ending December 31, 2015, or until
an earlier dissolution upon the occurrence of specified events. Middle Bay has a
perpetual term, subject to dissolution upon the occurrence of specified events.
- 127 -
<PAGE> 139
Anti-Takeover Provisions
There are no anti-takeover provisions in the Partnership Agreement. The
Partnership Agreement does provide for appraisal rights and cash payment in lieu
of accepting securities in exchange for Units in any "roll-up" transaction, as
defined in the Partnership Agreement.
There are no anti-takeover provisions in the Articles of Incorporation or Bylaws
of Middle Bay or under Alabama law.
Liquidation Rights
In the event of liquidation, the partners are entitled to a distribution in
proportion to their positive capital account balances after the creditors,
including partners who are creditors (to the extent permitted by law), have
been paid. If the liabilities of the Partnership exceed the assets upon
liquidation, or otherwise if the General Partner then has a negative balance in
its capital account, the General Partner must contribute funds to the
Partnership until the negative capital account is eliminated and the liabilities
are satisfied.
In the event of liquidation, holders of all classes of Series C Preferred shall
be entitled to share ratably and accordance to preference in any assets of
Middle Bay remaining after satisfaction of obligations to its creditors. Any
remaining assets shall be distributed ratably to holders of common stock. Middle
Bay currently has shares of Series B Preferred Stock outstanding and Series C
Preferred authorized for issuance pursuant to the Exchange Offer, but has no
plans to issue additional shares of preferred stock in the foreseeable future.
Right to Compel Dissolution
The Partnership may be dissolved by the written vote or consent by partners
representing a majority of the outstanding Units.
Under Alabama law, stockholders of Middle Bay may not vote to compel dissolution
of the Company without prior action by its Board of Directors.
- 128 -
<PAGE> 140
EXPERTS
The consolidated financial statements of Middle Bay for each of the two
years in the period ended December 31, 1997 included in this Prospectus have
been audited by Schultz, Watkins & Company, independent auditors, as stated in
their report appearing herein and have been so included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
The consolidated financial statements of the Partnership included in
this Prospectus for each of the two years in the period ended December 31, 1997
have been audited by Deloitte & Touche, LLP, independent auditors, as stated in
their report appearing herein and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The information appearing herein with respect to the fair market value
of the proved oil and gas reserves of the Partnership, to the extent stated
herein, was prepared by H.J. Gruy and Associates, Inc., independent petroleum
engineers, and is included herein on the authority of such firm as experts in
petroleum engineering.
The oil and gas reserve estimates of Middle Bay set forth elsewhere
herein were included in reliance upon the reports of Ryder Scott Company,
Houston, Texas; Lee Keeling and Associates, Inc., Tulsa, Oklahoma; Cawley,
Gillespie & Associates, Inc., Fort Worth, Texas; Huddleston & Co., Inc.,
Houston, Texas; and DeGolyer and MacNaughton, Dallas, Texas, all independent
petroleum consulting firms.
GLOSSARY
When the following terms are used in the text of the Registration
Statement, of which this Prospectus is a part, they have the meanings indicated:
"Bbl" - One stock tank barrel or 42 U.S. Gallons liquid volume,
usually used herein in reference to crude oil or other liquid hydrocarbons.
"Bcf" - One billion cubic feet; expressed, where gas sales
contracts are in effect, in terms of contractual temperature and pressure basis
and, where contracts are nonexistent, at 60 degrees Fahrenheit and 14.65 pounds
per square inch absolute.
"BOE" - Equivalent barrels of oil and, with reference to
natural gas, natural gas equivalents are determined using the ratio of six Mcf
of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
"Developed Acreage" - The number of acres which are allocated
or assignable to producing wells or wells capable of production.
- 129 -
<PAGE> 141
"Development Well" - A well drilled as an additional well to
the same reservoir as other producing wells on a Lease, or drilled on an offset
Lease not more than one location away from a well producing from the same
reservoir.
"Exploratory Well" - A well drilled in search of a new
undiscovered pool of oil or gas, or to extend the known limits of a field under
development.
"Gross Acres or Wells" - The total acres or wells, as the case
may be, in which an entity has an interest, either directly or through an
affiliate.
"Lease" - Full or partial interests in an oil and gas lease,
oil and gas mineral rights, fee rights or other rights, authorizing the owner
thereof to drill for, reduce to possession and produce oil and gas upon payment
of rentals, bonuses and/or royalties. Oil and gas leases are generally acquired
from private landowners and federal and state governments.
"Mcf" - One thousand cubic feet; expressed, where gas sales
contracts are in effect, in terms of contractual temperature and pressure bases
and, where contracts are nonexistent, at 60 degrees Fahrenheit and 14.65 pounds
per square inch absolute.
"Mineral Servitude" -
"Net Acres or Wells" - A party's interest in acres or wells
calculated by multiplying the number of Gross Acres or Gross Wells in which such
party has an interest by the fractional interest of such party in each such acre
or well.
"Operating Costs" - The expenses of producing oil or gas from a
formation, consisting of the costs incurred to operate and maintain wells and
related equipment and facilities, including labor costs, repair and maintenance,
supplies, insurance, production, severance and other production excise taxes.
"Prescription" -
"Producing Property" - A property (or interest therein)
producing oil and gas in commercial quantities or that is shut-in but capable of
producing oil and gas in commercial quantities, to which Producing Reserves have
been assigned by an independent petroleum engineer. Interests in a property may
include Working Interests, production payments, Royalty Interests and other
non-Working Interests.
"Prospect" - An area in which a party owns or intends to
acquire one or more oil and gas interests which is geographically defined on the
basis of geological data and which is reasonably anticipated to contain at least
one reservoir of oil, gas or other hydrocarbons.
- 130 -
<PAGE> 142
"Proved Developed Reserves" - Proved Reserves which can be
expected to be recovered through existing wells with existing equipment and
operating methods.
"Proved Reserves" - The estimated quantities of crude oil,
natural gas and other hydrocarbons which, based upon geological and engineering
data, are expected to be produced from known oil and gas reservoirs under
existing economic and operating conditions, and the estimated present value
thereof based upon the prices and costs on the date that the estimate is made
and any price changes provided for by existing conditions.
"Proved Undeveloped Reserves" -
"PV 10%" - The discounted future net cash flows for proved oil
and gas reserves computed using prices and costs, at the dates indicated, before
income taxes and a discount rate of 10%.
"Royalty Interest" - An interest in an oil and gas property
entitling the owner to a share of oil and gas production free of the costs of
production.
"Undeveloped Acreage" - Oil and gas acreage (including, in
applicable instances, rights in one or more horizons which may be penetrated by
existing well bores, but which have not been tested) to which Proved Reserves
have not been assigned by independent petroleum engineers.
"Working Interest" - The operating interest under a Lease which
gives the owner the right to drill, produce and conduct operating activities on
the property and a share of production, subject to all Royalty Interests, and
other burdens and to all costs of exploration, development and operations and
all risks in connection therewith.
- 131 -
<PAGE> 143
EXHIBIT "A"
September 23, 1998
Middle Bay Oil Company, Inc.
1221 Lamar, Suite 1020
Houston, Texas 77339
ESTIMATED FAIR MARKET VALUE
ENEX CONSOLIDATED PARTNERS, L.P.
98-292-102
Gentlemen:
At your request, we have estimated the net reserves, the future net cash flow,
the discounted net cash flow, the liquidation value, and the fair market value
as of October 1, 1998, for the partnership entitled Enex Consolidated Partners,
L.P., the general partner of which is Enex Resources Corporation (Enex). Middle
Bay Oil Company, Inc. (Middle Bay) owns a majority interest in Enex. Our
engagement and the appraisal performed thereunder is for the benefit of the
partnership and its partners.
The estimated net reserves, future net cash flow, and discounted net cash flow
as of October 1, 1998, are summarized by reserve category as follows:
<TABLE>
<CAPTION>
Estimated
Estimated Future Net Cash Flow
Net Reserves (Escalated)
------------------------ --------------------
Oil & Discounted
Condensate Gas at 10%
(Barrels) (Mcf) Nondiscounted Per Year
----------- --------- ------------- ---------------------
<S> <C> <C> <C> <C>
Proved Developed Producing 780,696 6,543,086 $ 21,234,520 $ 11,831,910
Proved Developed Nonproducing 16,520 2,414,782 $ 6,354,743 $ 2,309,049
----------- --------- ------------- ------------
TOTAL PROVED 797,216 8,957,868 $ 27,589,263 $ 14,140,959
Probable 15,771 691,548 $ 1,261,299 $ 627,724
Possible 1,249 178,500 $ 479,406 $ 311,624
</TABLE>
The estimated fair market value of the partnership is $10,380,000.
<PAGE> 144
FAIR MARKET VALUE AS USED HEREIN IS THE PRICE THAT A WILLING BUYER WILL PAY AND
A WILLING SELLER WILL ACCEPT AT A GIVEN POINT IN TIME, WITH NEITHER THE BUYER
NOR THE SELLER UNDER ANY COMPULSION TO BUY OR SELL, AND BOTH HAVING REASONABLE
KNOWLEDGE OF ALL THE MATERIAL CIRCUMSTANCES.
To estimate the fair market value attributable to the proved developed producing
reserves, the 10 percent discounted future net cash flow was adjusted to reflect
the impact of federal income tax. The internal rate of return and payout time
were computed for this quantity and compared with those at which current
acquisitions are completed. Suitable adjustments were then made to correspond to
these two financial indices. Proved developed nonproducing reserves are treated
similarly except that an additional adjustment is made for the capital
expenditure. For probable and possible reserves, the capital is added to the
discounted net cash flow, then multiplied by a suitable factor to account for
category risk and the capital then subtracted. This has the effect that capital
is spent with certainty and the operating cash income is burdened with the risk.
Internal rate of return and payout time are calculated for each to establish
reasonableness based upon the risk associated with the reserve category.
The estimated future net cash flow is that cash flow which will be realized from
the sale of the estimated net production after deduction of royalties, ad
valorem and production taxes, direct operating costs, and capital expenditures,
when applicable. Surface and well equipment salvage values, and well plugging
and field abandonment costs have not been considered in the cash flow
projections. Future net cash flow as stated in this report is before the
deduction of federal or state income tax.
The following parameters are incorporated in the economic projections referenced
in this report. Base oil, natural gas, and natural gas liquids prices are shown
in Table I. These prices are the average NYMEX prices for oil and natural gas
for the years 1998 through 2000. After the year 2000, prices are escalated at an
annual rate of 2.5 percent until the primary product reaches its maximum. Oil
and condensate prices are adjusted for gravity and transportation charges and
natural gas prices are adjusted for BTU content and transportation. Operating
expenses are escalated at an annual rate of 2.5 percent until the primary
product reaches its maximum value. The actual prices that will be received and
the associated costs may be more or less than those projected.
The liquidation value of the partnership was estimated to be $8,861,000. This
estimate assumes the orderly liquidation of partnership assets over a 12 month
period. In connection therewith, it is assumed that the partnership would incur
a total of $1,000,000 in general and administrative fees and approximately five
percent for third party expenses including broker fees, legal and land fees,
printing costs, and miscellaneous expenses.
For those wells with sufficient production history, reserve estimates and rate
projections are based on the extrapolation of established performance trends.
Reserves for other producing and nonproducing properties have been estimated
from volumetric calculations and analogy with the performance of comparable
wells. The reserves referenced in this study are estimates only and
Middle Bay Oil Company, Inc. September 23, 1998
-2-
<PAGE> 145
should not be construed as exact quantities. Future conditions may affect
recovery of estimated reserves and cash flow, and all categories of reserves may
be subject to revision as more performance data become available. Since this
work constitutes a fair market opinion, Gruy has a fiduciary obligation to the
partners to provide a value for all reserve categories; i.e., proved, probable,
and possible. The proved reserves are estimated in accordance with the
definitions included in the Securities and Exchange Commission Regulation S-X,
Rule 4-10(a) EXCEPT FOR THE PRICE AND COST ESCALATIONS. The definitions are
included in part as Attachment I. The probable and possible reserves conform to
the definitions approved by the Society of Petroleum Engineers, Inc. because the
SEC definitions do not include probable and possible reserves. These definitions
are included as Attachment II.
Extent and character of ownership, oil and gas prices, production data, direct
operating costs, capital expenditure estimates, and other data provided by
Middle Bay have been accepted as represented. The production data available to
us were at least through the month of November 1997, but nearly all producing
properties had data available through June 1998. Interim production to October
1, 1998, has been estimated. Operating expenses as supplied by Middle Bay were
not audited, but were reviewed for reasonableness. No independent well tests,
property inspections, or audits of operating expenses were conducted by our
staff in conjunction with this study. We did not verify or determine the extent,
character, obligations, status, or liabilities, if any, arising from any current
or possible future environmental liabilities that might be applicable.
In order to estimate the reserves, costs, and future cash flows referenced in
this report, we have relied in part on geological, engineering, and economic
data furnished by our client. Although we have made a best efforts attempt to
acquire all pertinent data and to analyze it carefully with methods accepted by
the petroleum industry, there is no guarantee that the volumes of oil or gas or
the cash flows projected will be realized. The reserve and cash flow projections
referenced in this report may require revision as additional data become
available.
H.J. Gruy and Associates, Inc. is unrelated to Middle Bay or Enex and has no
interest in the properties included in this report. In particular:
1. We do not own a financial interest in Middle Bay or Enex or its oil
and gas properties.
2. Our fee is not contingent on the outcome of our work or report.
3. We have not performed other services for or have any other
relationship with Middle Bay or Enex that would affect our
independence.
4. No instructions were given and no limitations were imposed by Middle
Bay or Enex on the scope or methodology to be used by us in preparing
such estimates. We did not accept or incorporate any assumptions
from Middle Bay or Enex, but merely called upon Middle Bay or Enex
to the extent customary in the oil and gas industry to gather
Middle Bay Oil Company, Inc. September 23, 1998
-3-
<PAGE> 146
and provide certain background information which we determined
to be relevant and appropriate. We determined what information
to use and how and to what extent such information should be
relied upon in estimating the fair market values shown above.
If investments or business decisions are to be made in reliance on these
estimates by anyone other than our client, such person with the approval of our
client is invited to visit our offices at his expense so that he can evaluate
the assumptions made and the completeness and extent of the data available on
which our estimates are based.
Any distribution or publication of this report or any part thereof must include
this letter in its entirety.
Yours very truly,
H.J. GRUY AND ASSOCIATES INC.
by:
----------------------------
James H. Hartsock, Ph.D., PE
Executive Vice President
by:
----------------------------
Sylvia Castilleja
Senior Reservoir Consultant
JHH:emb
Attachments
Middle Bay Oil Company, Inc. September 23, 1998
-4-
<PAGE> 147
TABLE I
OIL, NATURAL GAS, AND NATURAL GAS LIQUID PRICES
<TABLE>
<CAPTION>
OIL PRICE NATURAL GAS PRICE NGL
YEAR ($/BBL) ($/MCF) ($/BBL)
----------------- --------- ----------------- -------
<S> <C> <C> <C>
1998 (4th Quarter) 13.00 2.50 8.45
1999 14.00 2.30 9.10
2000 15.00 2.30 9.75
ESCALATION SCHEDULE
(% PER ANNUM) 2.50 2.50 2.50
MAXIMUM PRICE 35.00 4.50 22.75
</TABLE>
<PAGE> 148
ATTACHMENT I
<PAGE> 149
DEFINITIONS OF PROVED OIL AND GAS RESERVES(1)
PROVED OIL AND GAS RESERVES
Proved oil and gas reserves are the estimated quantities of crude oil, natural
gas, and natural gas liquid which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions, i.e., prices and
costs as of the date the estimate is made. Prices include consideration of
changes in existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions.
Reservoirs are considered proved if economic producibility is supported by
either actual production or conclusive formation test. The area of a reservoir
considered proved includes (A) that portion delineated by drilling and defined
by gas-oil and/or oil-water contacts, if any, and (B) the immediately adjoining
portions not yet drilled, but which can be reasonably judged as economically
productive on the basis of available geological and engineering data. In the
absence of information on fluid contacts, the lowest known structural occurrence
of hydrocarbons controls the lower proved limit of the reservoir.
Reserves which can be produced economically through application of improved
recovery techniques (such as fluid injection) are included in the "proved"
classification when successful testing by a pilot project, or the operation of
an installed program in the reservoir, provides support for the engineering
analysis on which the project or program was based.
Estimates of proved reserves do not include the following: (A) oil that may
become available from known reservoirs but is classified separately as
"indicated additional reserves"; (B) crude oil, natural gas, and natural gas
liquids, the recovery of which is subject to reasonable doubt because of
uncertainty as to geology, reservoir characteristics, or economic factors; (C)
crude oil, natural gas, and natural gas liquids, that may occur in undrilled
prospects; and (D) crude oil, natural gas, and natural gas liquids, that may be
recovered from oil shales, coal, gilsonite and other such sources.
PROVED DEVELOPED OIL AND GAS RESERVES
Proved developed oil and gas reserves are reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Additional oil and gas expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery should be included as "proved
developed reserves" only after testing by a pilot project or after the operation
of an installed program has confirmed through production response that increased
recovery will be achieved.
PROVED UNDEVELOPED RESERVES
Proved undeveloped oil and gas reserves are reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on undrilled
acreage shall be limited to those drilling units offsetting productive units
that are reasonably certain of production when drilled. Proved reserves for
other undrilled units can be claimed only where it can be demonstrated with
certainty that there is continuity of production from the existing productive
formation. Under no circumstances should estimates for proved undeveloped
reserves be attributable to any acreage for which an application of fluid
injection or other improved recovery technique is contemplated, unless such
techniques have been proved effective by actual tests in the area and in the
same reservoir.
- ------------
(1) Contained in Securities and Exchange Commission Regulation S-X, Rule 4-10(a)
<PAGE> 150
ATTACHMENT II
<PAGE> 151
PETROLEUM RESERVES DEFINITIONS
SOCIETY OF PETROLEUM ENGINEERS (SPE) AND WORLD PETROLEUM CONGRESS (WPC)(1)
Reserves are those quantities of petroleum which are anticipated to be
commercially recovered from known accumulations from a given date forward. All
reserve estimates involve some degree of uncertainty. The uncertainty depends
chiefly on the amount of reliable geologic and engineering data available at the
time of the estimate and the interpretation of these data. The relative degree
of uncertainty may be conveyed by placing reserves into one of two principal
classifications, either proved or unproved. Unproved reserves are less certain
to be recovered than proved reserves and may be further sub-classified as
probable and possible reserves to denote progressively increasing uncertainty in
their recoverability.
The intent of the SPE and WPC in approving additional classifications beyond
proved reserves is to facilitate consistency among professionals using such
terms. In presenting these definitions, neither organization is recommending
public disclosure of reserves classified as unproved. Public disclosure of the
quantities classified as unproved reserves is left to the discretion of the
countries or companies involved.
Estimation of reserves is done under conditions of uncertainty. The method of
estimation is called deterministic if a single best estimate of reserves is made
based on known geological, engineering and economic data. The method of
estimation is called probabilistic when the known geological, engineering, and
economic data are used to generate a range of estimates and their associated
probabilities. Identifying reserves as proved, probable, and possible has been
the most frequent classification method and gives an indication of the
probability of recovery. Because of potential differences in uncertainty,
caution should be exercised when aggregating reserves of different
classifications.
Reserves estimates will generally be revised as additional geologic or
engineering data become available or as economic conditions change. Reserves do
not include quantities of petroleum being held in inventory, and may be reduced
for usage of processing losses if required for financial reporting.
Reserves may be attributed to either natural energy or improved recovery
methods. Improved recovery methods include all methods for supplementing natural
energy or altering natural forces in the reservoir to increase ultimate
recovery. Examples of such methods are pressure maintenance, cycling,
waterflooding, thermal methods, chemical flooding, and the use of miscible and
immiscible displacement fluids. Other improved recovery methods may be developed
in the future as petroleum technology continues to evolve.
PROVED RESERVES
Proved reserves are those quantities of petroleum which, by analysis of
geological and engineering data, can be estimated with reasonable certainty to
be commercially recoverable, from a given date forward, from known reservoirs
and under current economic conditions, operating methods, and government
regulations. Proved reserves can be categorized as developed or undeveloped.
If deterministic methods are used, the term reasonable certainty is intended to
express a high degree of confidence that the quantities will be recovered. If
probabilistic methods are used, there should be at least a 90% probability that
the quantities actually recovered will equal or exceed the estimate.
Establishment of current economic conditions should include relevant historical
petroleum prices and associated costs and may involve an averaging period that
is consistent with the purpose of the reserve estimate, appropriate contract
obligations, corporate procedures, and government regulations involved in
reporting these reserves.
In general, reserves are considered proved if the commercial producibility of
the reservoir is supported by actual production or formation tests. In this
context, the term proved refers to the actual quantities of petroleum reserves
and not just the productivity of the well or reservoir. In certain cases, proved
reserves may be assigned on the basis of well logs and/or core analysis that
indicate the subject reservoir is hydrocarbon bearing and is analogous to
reservoirs in the same area that are producing or have demonstrated the ability
to produce on formation tests.
The area of the reservoir considered as proved includes (1) the area
delineated by drilling and defined by fluid contacts, if any, and (2) the
undrilled portions of the reservoir that can reasonably be judged as
commercially productive on the basis of available geological and engineering
data. In the absence of data on fluid contacts, the lowest known occurrence of
hydrocarbons controls the proved limit unless otherwise indicated by definitive
geological, engineering or performance data.
- ------------
(1) Approved by the Board of Directors, Society of Petroleum Engineers
(SPE), Inc. on March 7, 1997.
<PAGE> 152
Reserves may be classified as proved if facilities to process and transport
those reserves to market are operational at the time of the estimate or there is
a reasonable expectation that such facilities will be installed. Reserves in
undeveloped locations may be classified as proved undeveloped provided (1) the
locations are direct offsets to wells that have indicated commercial production
in the objective formation, (2) it is reasonably certain such locations are
within the known proved productive limits of the objective formation, (3) the
locations conform to existing well spacing regulations where applicable, and (4)
it is reasonably certain the locations will be developed. Reserves from other
locations are categorized as proved undeveloped only where interpretations of
geological and engineering data from wells indicate with reasonable certainty
that the objective formation is laterally continuous and contains commercially
recoverable petroleum at locations beyond direct offsets.
Reserve which are to be produced through the application of established improved
recovery methods are included in the proved classification when (1) successful
testing by a pilot project or favorable response of an installed program in the
same or an analogous reservoir with similar rock and fluid properties provides
support for the analysis on which the project was based, and, (2) it is
reasonably certain that project will proceed. Reserves to be recovered by
improved recovery methods that have yet to be established through commercially
successful applications are included in the proved classification only (1) after
a favorable production response from the subject reservoir from either (a) a
representative pilot or (b)an installed program where the response provides
support for the analysis on which the project is based and (2) it is reasonably
certain the project will proceed.
UNPROVED RESERVES
Unproved reserves are based on geologic and/or engineering data similar to that
used in estimates of proved reserves; but technical, contractual, economic, or
regulatory uncertainties preclude such reserves being classified as proved.
Unproved reserves may be further classified as probable reserves and possible
reserves.
Unproved reserves may be estimated assuming future economic conditions different
from those prevailing at the time of the estimate. The effect of possible future
improvements in economic conditions and technological developments can be
expressed by allocating appropriate quantities of reserves to the probable and
possible classifications.
PROBABLE RESERVES
Probable reserves are those unproved reserves which analysis of geological and
engineering data suggests are more likely than not to be recoverable. In this
context, when probabilistic methods are used, there should be a least a 50%
probability that the quantities actually recovered will equal or exceed the sum
of estimated proved plus probable reserves.
In general, probable reserves may include (1) reserves anticipated to be proved
by normal step-out drilling where subsurface control is inadequate to classify
these reserves as proved, (2) reserves in formations that appear to be
productive based on well log characteristics but lack core data or definitive
tests and which are not analogous to producing or proved reservoirs in the area,
(3) incremental reserves attributable to infill drilling that could have been
classified as proved if closer statutory spacing had been approved at the time
of the estimate, (4) reserves attributable to improved recovery methods that
have been established by repeated commercially successful applications when (a)
a project or pilot is planned but not in operation and (b) rock, fluid, and
reservoir characteristics appear favorable for commercial application, (5)
reserves in an area of the formation that appears to be separated from the
proved area by faulting and the geologic interpretation indicates the subject
area is structurally higher than the proved area, (6) reserves attributable to a
future workover, treatment, re-treatment, change of equipment, or other
mechanical procedures, where such procedure has not been proved successful in
wells which exhibit similar behavior in analogous reservoirs, and (7)
incremental reserves in proved reservoirs where an alternative interpretation of
performance or volumetric data indicates more reserves than can be classified as
proved.
POSSIBLE RESERVES
Possible reserves are those unproved reserves which analysis of geological and
engineering data suggests are less likely to be recoverable than probable
reserves. In this context, when probabilistic methods are used, there should be
a least a 10% probability that the quantities actually recovered will equal or
exceed the sum of estimated proved plus probable plus possible reserves.
In general, possible reserves may include (1) reserves which, based on
geological interpretations, could possibly exist beyond areas classified as
probable, (2) reserves in formations that appear to be petroleum bearing based
on log and core analysis but may not be productive at commercial rates, (3)
incremental reserves attributed to infill drilling that are subject to technical
uncertainty, (4) reserves attributed to improved recovery methods when (a) a
project or pilot is planned but not in operation and
<PAGE> 153
(b) rock, fluid, and reservoir characteristics are such that a reasonable doubt
exists that the project will be commercial, and (5) reserves in an area of the
formation that appears to be separated from the proved area by faulting and
geological interpretation indicates the subject area is structurally lower than
the proved area.
RESERVE STATUS CATEGORIES
Reserve status categories define the development and producing status of wells
and reservoirs.
DEVELOPED: Developed reserves are expected to be recovered from
existing wells including reserves behind pipe. Improved recovery
reserves are considered developed only after the necessary equipment
has been installed, or when the costs to do so are relatively minor.
Developed reserves may be sub-categorized as producing or
non-producing.
PRODUCING: Reserves subcategorized as producing are expected
to be recovered from completion intervals which are open and
producing at the time of the estimate. Improved recovery
reserves are considered producing only after the improved
recovery project is in operation.
NON-PRODUCING. Reserves subcategorized as non-producing
include shut-in and behind-pipe reserves. Shut-in reserves are
expected to be recovered from 1) completion intervals which
are open at the time of the estimate but which have not
started producing, (2) wells which were shut-in for market
conditions or pipeline connections (3) wells not capable of
production for mechanical reasons. Behind-pipe reserves are
expected to be recovered from zones in existing wells, which
will require additional completion work or future recompletion
prior to the start of production.
UNDEVELOPED RESERVES: Undeveloped reserves are expected to be
recovered: (1) from new wells on undrilled acreage, (2) from deepening
existing wells to a different reservoir, or (3) where a relatively
large expenditure is required to (a) recomplete an existing well or (b)
install production or transportation facilities for primary or improved
recovery projects.
<PAGE> 154
EXHIBIT B
THE PROPOSAL
Set forth below is a proposed Amendment No. 1 ("Amendment") to the Amended
Articles of Limited Partnership (the "Partnership Agreement") of Enex
Consolidated Partners, L.P. (the "Partnership"). This Amendment shall be
effective upon the acceptance pursuant to the Exchange Offer of written
consents from Investors holding a majority (greater than 60%) of the interests
in the Partnership. If the Amendment becomes effective, it will become a
separate article of the Partnership Agreement and shall be placed immediately
after the last article contained in the Partnership Agreement.
PROPOSED AMENDMENT NO. 1
Notwithstanding any provisions of this Agreement to the contrary, it is
hereby agreed as follows:
1. DEFINITIONS. Except as defined in the Partnership Agreement or this
Amendment, each capitalized term used herein shall, for the purposes of this
Amendment, have the meaning ascribed to it in the Prospectus dated October __,
1998 of Middle Bay Oil Company, Inc., an Alabama corporation ("Middle Bay").
2. ELIMINATION OF RESTRICTIONS. No provision of this Agreement shall
prohibit, limit or prevent (i) the transfer and conveyance of all the assets
and liabilities of the Partnership to Middle Bay in exchange for Series C
Convertible Redeemable Preferred Stock of Middle Bay ("Series C Preferred")
pursuant to and in accordance with the terms of the Exchange Offer or
otherwise, or (ii) the distribution of Series C Preferred to Unitholders of the
Partnership ("Unitholders") upon dissolution of the Partnership. In addition,
no consent of the Partnership or any Unitholder, opinion of counsel or other
procedure shall be required in order to enable any Unitholder, the Partnership
or Middle Bay to effect any such transfer, Exchange Offer or distribution.
3. EXCHANGE OF PARTNERSHIP ASSETS AND LIABILITIES FOR SERIES C
PREFERRED. Effective as of the Effective Date, the Partnership shall transfer
and convey all of the Partnership's assets and liabilities to Middle Bay in
exchange for Series C Preferred pursuant to and in accordance with the terms of
the Exchange Offer.
4. ELECTION TO DISSOLVE. Immediately after consummation of the Exchange
Offer, the Partnership shall be dissolved. Upon its dissolution, the business
and affairs of the Partnership shall be terminated and wound up and, as soon as
practicable thereafter, any and all Series C Preferred held by the Partnership
shall be distributed in kind to Unitholders (or their assignees), with each
Unitholder (or his assignee) to receive such number of whole shares of Series C
Preferred whose value, in the aggregate, is equal to the Exchange Value
multiplied by the number of Units held by such Unitholder plus a cash
distribution in exchange for any remaining for fractional Unit.
5. AUTHORITY OF GENERAL PARTNER. Enex, in its capacity as general
partner of the Partnership, shall execute, acknowledge, verify, deliver, file
and record, for and in the name of the Partnership, any and all documents and
shall do and perform all acts required by applicable law or that it deems
necessary or desirable in order to give effect to this article and the
transactions contemplated herein, including but not limited to the dissolution,
termination, winding-up and distribution contemplated by paragraph 4 of this
article.
6. THIS ARTICLE CONTROLLING. The provisions of this article shall
control over all other provisions of this Agreement.
Except as herein expressly amended, all other terms and provisions of the
Amended Articles of Limited Partnership shall remain in full force and effect.
<PAGE> 155
EXHIBIT C
MIDDLE BAY OIL COMPANY, INC.
LETTER OF TRANSMITTAL
FOR
INVESTORS IN
ENEX CONSOLIDATED PARTNERS, L.P.
Capitalized terms used but not defined herein have the meanings given
to them in the Prospectus of Middle Bay Oil Company, Inc., as supplemented or
amended (the "Prospectus"). General instructions are included in Part VI.
This Letter of Transmittal must be received by the Exchange Agent on
or before 5:00 p.m. Central Time on __________, 1998 unless the Exchange Offer
is extended. To accept the Exchange Offer or withhold consent to the related
Proposal, please complete this Letter in accordance with the Instructions in
Items IV and VI and send or deliver the completed Letter of Transmittal to the
Exchange Agent. Neither accepting the Exchange Offer nor withholding consent to
the Proposal will prevent an Investor from challenging the fairness of the
Exchange Offer.
Adoption of the Proposal requires consent by Investors holding 60% of
the units in the Partnership. Assuming consummation of the Exchange Offer, all
of the partners of the Partnership, whether or not they tender their Interests,
will receive the same number of shares of Common Stock they would have received
had they tendered their Interests, except that California investors exercising
their limited dissenters' rights or other Investors exercising their
contractual dissenters' rights may receive a higher or lower number of shares.
See Parts V and VI, below, and "The Exchange Offer and Proposal" in the
Prospectus.
Exchange Agent: BANK OF OKLAHOMA, N.A.
<TABLE>
<CAPTION>
By Mail: Facsimile Transmission: By Hand or Overnight Courier:
-------- ----------------------- -----------------------------
<S> <C> <C>
Bank of Oklahoma, N.A. (405) 936-3964 Bank of Oklahoma, N.A.
Attn: Cyndi Wilkinson (For Eligible Institutions Only) Commerce Center, Suite 110
P.O. Box 24128 Confirm by Telephone: 9520 North May Avenue
Oklahoma City, OK 73124 --------------------- Oklahoma City, OK 73120
(405) 936-3902
</TABLE>
Delivery of this Letter is at the risk of the Investor. If sent by
U.S. mail, it is recommended that an Investor use certified mail, return
receipt requested.
C - 1
<PAGE> 156
PART I
NAME AND ADDRESS OF INVESTOR
- ---------------------------------------------
- ---------------------------------------------
- ---------------------------------------------
PART II
DESCRIPTION OF INTERESTS
Set forth below with respect to your Interest are (i) the number of
Partnership Units held of record, (ii) the Exchange Value attributable to your
Interest and (iii) the number of shares of Common Stock offered for your
Interest.
<TABLE>
<S> <C> <C>
PARTNERSHIP EXCHANGE EXCHANGE
INTERESTS X VALUE $11.83 = SHARES
-------- ------------------ ----------
</TABLE>
PART III
REPRESENTATIONS, WARRANTIES, COVENANTS AND
POWER OF ATTORNEY
An Investor checking the "Tender and Consent" box and signing Part IV
below ("Consenting Investor") hereby (i) accepts the Exchange Offer on the
terms and subject to the conditions set forth in the Prospectus, receipt of a
copy of which is hereby acknowledged, and tenders to Middle Bay Oil Company,
Inc. ("Middle Bay") all of his Interest in the Partnership, thereby consenting
to the Proposal, and (ii) subject to acceptance of the tender made hereby,
sells, transfers, contributes and assigns to Middle Bay all right, title and
interest in the Interest tendered hereby. Tenders of Interests are revocable
upon written notice to Middle Bay at any time prior to the Expiration Date.
An Investor checking the "Withhold Consent" box and signing Part IV
below or Part V for California residents ("Non-consenting Investor") hereby (i)
acknowledges receipt of the Prospectus and (ii) assuming adoption of the
Proposal, accepts the Common Stock offered in exchange for all right, title and
interest in the Interest represented by the Partnership Interests set forth
above.
The undersigned Investor represents and warrants to Middle Bay that,
as of the Closing Date, (i) he has not disposed of or agreed to dispose of his
Interest other than pursuant to the Exchange Offer, (ii) upon
C - 2
<PAGE> 157
exchange of his Interest pursuant to the Exchange Offer, Middle Bay will
acquire good and marketable title to the Interest, free and clear of all liens,
encumbrances and adverse claims, (iii) he has full legal right, power and
authority to convey his Interest pursuant to the Exchange Offer, (iv) he has
received and reviewed a copy of the Prospectus and (v) he is qualified to make
decisions with respect to investments presenting an investment decision similar
to that involved in the Exchange Offer. All representations, warranties and
covenants contained herein shall survive the Closing Date and all other
transactions contemplated by this Letter and the Prospectus.
In connection with the solicitation of written consents of Investors
in the Partnership, each Consenting Investor below hereby (i) represents and
warrants to Middle Bay that he has full legal right, power and authority to
execute a written consent with respect to the Proposal and (ii) consents to the
adoption of the Proposal to amend the Partnership Agreement, as described in
the Prospectus.
The undersigned Investor hereby irrevocably appoints Middle Bay or any
designee of Middle Bay, with full power of substitution, as his true and lawful
attorney-in-fact, in his name, place and stead, to execute on behalf of the
Investor any additional documents necessary to consummate the Exchange and the
withdrawal and transfer of the assets underlying his Interest. This power of
attorney shall become effective upon acceptance by Middle Bay of his Interest,
shall be deemed coupled with an interest, shall be irrevocable (except in the
event of a withdrawal of a Consenting Investor's tender of his Interest
following a modification or amendment of the Exchange Offer), is granted in
consideration of the acceptance of his Interest, shall survive the death,
incapacity, dissolution or termination of the existence of the Investor and
shall be binding upon the Investor's heirs, legal representatives or assigns.
The following information must be completed in order to entitle the
Soliciting Dealer to receive a fee in connection with the Exchange Offer.
-------------------------------------
Name of Soliciting Dealer
(Please Print)
-------------------------------------
Name of Account Executive
(Please Print)
-------------------------------------
City and State of Account Executive
C - 3
<PAGE> 158
PART IV
ALL INVESTORS
(NON-CONSENTING CALIFORNIA RESIDENTS, SEE PART V)
(OTHER NON-CONSENTING UNITHOLDERS, SEE PART VI)
CALIFORNIA INVESTORS ELECTING TO EXERCISE DISSENTERS' RIGHTS SHOULD INSTEAD
COMPLETE PART V.
Consent to the Proposal being submitted by Middle Bay to adopt the
Amendment to the Partnership Agreement:
[ ] Tender and Consent [ ] Withhold Consent
SIGNATURE BOX
(NOT FOR NON-CONSENTING CALIFORNIA RESIDENTS -- SEE PART V)
Please sign exactly as your name is printed in Part I above, unless printed
incorrectly. When signing as partner, a general corporate officer,
attorney-in-fact, executor, administrator, trustee or guardian, please give
full title and send proper evidence of authority with this consent. For joint
owners, each joint owner must sign.
----------------------------------------------
Full Name of Investor (Please Print)
----------------------------------------------
Full Name of Co-owner, if any (Please Print)
----------------------------------------------
Signature of Investor (Please Print)
----------------------------------------------
Signature of Co-owner, if any (Please Print)
Business Telephone: (----) ------------------
Home Telephone: (----) ----------------------
Dated: ------------------------------- , 1998
IF THE INVESTOR FAILS TO INDICATE WHETHER CONSENT TO THE PROPOSAL IS GIVEN OR
WITHHELD, CONSENT WILL BE DEEMED TO BE GIVEN.
C - 4
<PAGE> 159
PART V
NON-CONSENTING CALIFORNIA INVESTORS
(COMPLETE ONLY IF YOU DO NOT WISH TO TENDER YOUR INTEREST PURSUANT TO THE
EXCHANGE OFFER AND WISH TO EXERCISE YOUR DISSENTERS' RIGHTS.)
The non-consenting Investor signing in this Part V represents that
California is the Investor's state of residence and withholds his consent to
the Proposal to approve and adopt the Amendment to the Partnership Agreement.
By withholding consent, a non-consenting California Investor will exercise his
dissenter's rights and will be deemed to have made the representations,
warranties and covenants (other than the consent to the adoption of the
Proposal) set forth in Part III above, and he will receive, pursuant to those
dissenters' rights, the number of shares of Common Stock equal to the Exchange
Value of his Interest divided by the average closing prices of the Units on
NASDAQ Small Cap Market during the twenty trading days immediately after the
Closing Date.
SIGNATURE BOX
(ONLY FOR NON-CONSENTING CALIFORNIA RESIDENTS)
Please sign exactly as your name is printed in Part I above, unless
printed incorrectly. When signing as general partner, corporate officer,
attorney-in-fact, executor, administrator, trustee or guardian, please give
full title and send proper evidence of authority with this consent. For joint
owners, each joint owner must sign.
----------------------------------------------
Full Name of Investor (Please Print)
----------------------------------------------
Full Name of Co-owner, if any (Please Print)
----------------------------------------------
Signature of Investor (Please Print)
----------------------------------------------
Signature of Co-owner, if any (Please Print)
Business Telephone: ( )
---- ------------------
Home Telephone: ( )
---- ----------------------
Dated: , 1998
----------------------------------
C - 5
<PAGE> 160
PART VI
OTHER NON-CONSENTING INVESTORS
(COMPLETE ONLY IF YOU DO NOT WISH TO TENDER YOUR INTEREST PURSUANT TO THE
EXCHANGE OFFER AND WISH TO EXERCISE YOUR CONTRACTUAL DISSENTERS' RIGHTS.)
The non-consenting Investor signing in this Part VI withholds his or
her consent to the Proposal to approve and adopt the Amendment to the
Partnership Agreement. By withholding consent, a non-consenting Investor will
exercise his or her dissenter's rights and will be deemed to have made the
representations, warranties and covenants (other than the consent to the
adoption of the Proposal) set forth in Part III above, and he or she will
receive, pursuant to those contractual dissenters' rights granted under Section
8.10 of the Amended Articles of Limited Partnership of Enex Consolidated
Partners, L.P. a cash payment equal to the number of units held by the
Investor, multiplied by the percent value of all units as determined by an
independent expert instructed to assume an orderly liquidation of partnership
assets over a 12-month period. The Appraisal Report, including a summary of the
appraisal indicating all material assumptions underlying the appraisal, is
included as Appendix "E" to the Prospectus.
SIGNATURE BOX
(ONLY FOR OTHER NON-CONSENTING INVESTORS)
Please sign exactly as your name is printed in Part I above, unless
printed incorrectly. When signing as general partner, corporate officer,
attorney-in-fact, executor, administrator, trustee or guardian, please give
full title and send proper evidence of authority with this consent. For joint
owners, each joint owner must sign.
----------------------------------------------
Full Name of Investor (Please Print)
----------------------------------------------
Full Name of Co-owner, if any (Please Print)
----------------------------------------------
Signature of Investor (Please Print)
----------------------------------------------
Signature of Co-owner, if any (Please Print)
Business Telephone: (----) ------------------
Home Telephone: (----) ----------------------
Dated: ---------------------------------, 1998
C - 6
<PAGE> 161
PART VII
INSTRUCTIONS
1. Previously Transferred Interests. If an Investor has transferred,
whether by sale, gift, death or otherwise, the beneficial ownership of any
Interest of which he has been named a holder of record in the accompanying
Letter of Transmittal without previously notifying Middle Bay or complying with
the procedures set forth in the Partnership Agreement for transferring his
Interest in the Partnership, he or she should notify Middle Bay of that fact
and identify the Interest transferred, the date of transfer and the name,
address and tax identification number of the assignee. Middle Bay will then
send the Investor and the assignee revised Letters of Transmittal and request
from the Investor or assignee such other documents as it may require in order
to facilitate the tender, if desired, of an assignee's interest in the
Partnership.
2. Participation in Exchange. To be entitled to receive the Common
Stock in the Exchange, even if consent to the Proposal is withheld, or cash
payment if dissenting under Part IV, an Investor must deliver one
originally-executed copy of the Letter of Transmittal, completed, dated and
signed in the Signature Box in Part IV, or the Signature Box in Part V for
non-consenting California residents, or the Signature Box in Part VI for other
non-consenting Investors. Delivery is at the risk of the Investor. A tender or
notice of dissent will be effective only when the Letter is actually received
by the Exchange Agent. The Letter must be received by the Exchange Agent on or
before 5:00 p.m. Central Time on _________, 1988 unless the Exchange Offer is
extended, in which event the Letter must be received by the latest time and
date on which the Exchange Offer, as so extended, will expire. Middle Bay may
revoke, at its sole discretion, any incomplete or non-conforming Letter of
Transmittal.
3. Signatures. The Letter must be signed by the Investor whose name
appears in Part I of the Letter. If the Interest is held in the names of two or
more persons, all such persons must sign the Letter. With respect to Interests
held by entities such as trusts, joint ventures, limited partnerships or
general partnerships, Middle Bay may require that the Letter of Transmittal be
accompanied by evidence acceptable to Middle Bay that the entity has met all
requirements of its governing instruments, such as applicable partnership or
joint venture agreements, and that the person signing the Letter is authorized
to sign for the Investor under the laws of the jurisdiction in which the entity
was organized.
TO PARTICIPATE IN THE EXCHANGE OFFER, AN INVESTOR MUST SIGN
IN THE SIGNATURE BLOCK IN PART IV (OR PART V FOR CALIFORNIA INVESTORS OR PART
VI FOR OTHER DISSENTING INVESTORS), EVEN IF THE INVESTOR OBJECTS TO THE
EXCHANGE OFFER AND ELECTS TO WITHHOLD HIS OR HER CONSENT TO THE PROPOSAL.
INVESTORS WILL NOT RECEIVE SHARES IN THE EXCHANGE UNTIL A SIGNED LETTER OF
TRANSMITTAL IS RETURNED.
4. Conditional Tenders. No alternative, conditional or contingent
tenders will be accepted.
5. Withdrawal of Tenders. Tenders of Interests and consents to the
Proposal are revocable at any time prior to the Expiration Date by delivering a
notice of withdrawal to Middle Bay.
C - 7
<PAGE> 162
6. Validity of Tenders. All questions on the validity, form,
eligibility (including time of receipt) and acceptance of Interests will be
determined by Middle Bay, and its determination will be final and binding.
Interpretation by Middle Bay of the terms and conditions of the Exchange Offer
(including the instructions to the Letter of Transmittal) will also be final
and binding. Middle Bay reserves the right to waive any irregularities or
conditions on the manner of tender, and the interpretation by Middle Bay of the
terms and conditions of the Exchange Offer (including the instructions in the
Letter of Transmittal) shall be final and binding. Any irregularities in
connection with tenders must be cured within such time as Middle Bay shall
determine unless waived by it.
Tenders will be deemed not to have been made until any
irregularities have been cured or waived. Any Letter of Transmittal which is not
properly completed and executed, and as to which irregularities are not cured or
waived, will be returned by Middle Bay to the Investor as soon as practicable.
Middle Bay is under no duty to give notification of defects in tenders and will
not incur any liability for failure to give notification.
Middle Bay will not accept tenders of less than all of an Investor's
Interest in the Partnership.
7. Consents to Proposal. A tender of an Interest constitutes a consent
to the Proposal. Only persons who are holders of record of Partnership
Interests on the date of the Prospectus may vote on the Proposal.
8. Contractual Dissenters' Rights. All investors have limited
dissenters' rights under Section 8.10 of the Amended Articles of Limited
Partnership in connection with the proposed Exchange Offer. By signing Part VI
and thereby withholding consent to the Proposal, an Investor will be deemed to
exercise his dissenter's rights and will receive a cash payment as indicated in
Part IV and as set forth in the Prospectus (please see "The Exchange Offer and
Proposal -- Appraisal and Dissenter's Rights").
9. Dissenters' Rights for California Residents. Investors residing in
California have limited dissenters' rights in accordance with the requirements
for roll-up transactions. By signing Part V and thereby withholding consent to
the Proposal, Investors in that state will be deemed to exercise their
dissenters' rights and will receive the number of shares of Common Stock equal
to the Exchange Value of their Interests divided by the average closing prices
of the Units on NASDAQ Small Cap Market during the twenty trading days
immediately after the Closing Date. Each California Investor withholding
consent to the Proposal will also be deemed to have tendered his Interest for
that number of Units and therefore will not be required to separately submit an
executed Transfer Application. If the average price of the Units during the
specified period after the Closing Date is lower than the Exchange Price,
dissenting California Investors will receive more for their Interests than they
would otherwise receive in the Exchange Offer. Any increase in the market price
of the Common Stock during that period relative to the Exchange Price, however,
would reduce the number of shares that dissenting California Investors will
receive in the Exchange Offer.
Although the roll-up requirements for California residents
entitle them to an appraisal in roll- up transactions involving their
investments, Investors residing in California who exercise these dissenters'
rights will not be entitled to a separate appraisal for their Interests because
the Exchange Value of the Common
C - 8
<PAGE> 163
Stock determined by Middle Bay exceeds the liquidation value assigned to the
Partnership's net assets in an independent appraisal already performed in
accordance with the Partnership Agreement.
California residents may choose to exercise their dissenters'
rights either under Part V or Part VI (but not both), and such exercise waives
all dissenters' rights not exercised.
C - 9
<PAGE> 164
HARRIS WEBB & GARRISON EXHIBIT EXHIBIT "D"
INVESTMENT BANKERS
G. CLYDE BUCK
MANAGING DIRECTOR
October 15, 1998
PERSONAL AND CONFIDENTIAL
Middle Bay Oil Company, Inc.
1221 Lamar, Suite 1020
Houston, Texas 77010
Attention: Board of Directors
Gentlemen:
You have advised Harris Webb & Garrison, Inc. ("HWG") that Middle Bay
Oil Company, Inc. ("Middle Bay") has proposed to acquire all of the limited
partnership interests (the "Units") in Enex Consolidated Partners, L.P. (the
"Enex Partnership") by offering to the owners of those Units 2.128 shares of
Convertible Redeemable Series C Preferred Stock (the "Preferred Stock") to be
issued by Middle Bay in exchange for each Partnership Unit (the "Exchange").
The Preferred Stock will have a cumulative annual cash dividend rate of $0.50
per share, which is 10% of its stated value of $5.00 per share and will be
convertible, at any time at the option of the holder, into Middle Bay common
stock at a conversion price of $5.00 per share, subject to certain
anti-dilution adjustments. The Preferred Stock will be redeemable at the option
of Middle Bay on and after January 1, 2000 at a redemption price of $5.00 per
share plus accrued and unpaid dividends. You have requested that HWG act as
financial advisor and issue an opinion ("Opinion") as to the fairness to the
public limited partners of the Enex Partnership of the financial terms of the
proposed Exchange.
HWG, as part of its investment banking business, is frequently engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, secondary distributions of listed
and unlisted securities, private placements, and valuations for estate,
corporate and other purposes.
HARRIS WEBB & GARRISON, INC.
5599 San Felipe, Suite 301, Houston, Texas 77056
Telephone: (713) 993-4600
<PAGE> 165
Middle Bay Oil Company, Inc.
October 15, 1998
Page 2
In arriving at our Opinion, we have, among other things:
Reviewed Middle Bay's draft Form S-4 Registration Statement dated
July 31, 1998 and a draft of Amendment No. 1 to Form S-4
Registration Statement dated October 14, 1998;
Reviewed the Enex Partnership's 10-KSB report for the year ended
December 31, 1997 with financial statements audited by
Deloitte & Touche, L.L.P.;
Reviewed the Enex Partnership's 10-QSB reports for the quarters ended
March 31, 1998 and June 30, 1998;
Reviewed Middle Bay's 10-KSB report for the year ended December 31,
1997 with financial statements audited by Schultz, Watkins &
Company;
Reviewed Middle Bay's 10-QSB reports for the quarters ended March 31,
1998 and June 30, 1998;
Reviewed summary pages of the Enex Parnership's reserve reports
prepared by H.J. Gruy and Associates, Inc. as of July 1, 1998
and October 1, 1998;
Reviewed summary pages of Middle Bay's reserve report prepared by
Middle Bay as of July 1, 1998 and October 1, 1998;
Reviewed historical distributions made to limited partners of the Enex
Partnership and its predecessors;
Discussed with management of Middle Bay and the Enex Partnership the
outlook for future operating results, the assets and
liabilities of both companies, materials in the foregoing
documents, and other matters we considered relevant to our
inquiry; and
Considered such other information, financial studies, analyses and
investigations as we deemed relevant under the circumstances.
In our review and in arriving at our Opinion, we have, with your
permission, (i) not independently verified any of the foregoing information and
have relied upon its being complete and accurate in all material respects, (ii)
with respect to any estimates, evaluations and projections furnished to us,
assumed that such information was reasonably prepared and based upon the best
currently available information and good faith judgement of the person
furnishing the same, and (iii) not made an independent evaluation or appraisal
of specific assets of Middle Bay or the Enex Partnership.
<PAGE> 166
Middle Bay Oil Company, Inc.
October 15, 1998
Page 3
In addition, we have not made a physical inspection of the oil and gas
properties of Middle Bay or the Enex Partnership, nor have we made any
independent evaluations, appraisals or investigations of the other assets of
Middle Bay or the Enex Partnership. In rendering this Opinion, we have not
considered, nor have we reviewed, the terms of the limited partnership
agreement of the Enex Partnership (or other relevant agreements among its
partners), nor have we considered the effect that structural and legal
differences of investment in a limited partnership and a corporation may have
upon the fairness of the Exchange to limited partners of the Enex Partnership.
We are not experts in geological and engineering evaluation of oil and gas
reserves. In rendering our Opinion, we have relied upon, among the other
information described above, the report of H.J. Gruy and Associates, Inc. dated
September 23, 1998 of (i) the net reserves of the Enex Partnership and future
net cash flow and discounted net cash flow thereof as of October 1, 1998 and
(ii) the estimated fair market value and liquidation value of the Enex
Partnership.
Our Opinion is based upon market, economic and other conditions as they exist
and can be evaluated as of the date of this letter. HWG consents to the
inclusion of the text of this Opinion in any notice or appropriate disclosure
to the limited partners of the Enex Partnership and in any filing that Middle
Bay or the Enex Partnership is required by law to make, or include in documents
filed, with the Securities and Exchange Commission.
Based upon and subject to the foregoing, it is our Opinion that, as of
the date hereof, the proposed Exchange is fair to the public limited
partnership unitholders of the Enex Partnership from a financial point of view.
HARRIS WEBB & GARRISON, INC.
By:__________________________
G. Clyde Buck
Managing Director
<PAGE> 167
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Middle Bay Oil Company, Inc.
Independent Auditors' Report..................................... F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996..... F-2
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996.................................... F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1997 and 1996.................................... F-6
Consolidated Statements of Changes in Stockholders' Equity for
Year Ended December 31, 1997 and 1996......................... F-7
Notes to Consolidated Financial Statements....................... F-9
Enex Consolidated Partners, L.P.
Independent Auditors' Report..................................... F-27
Balance Sheet as of December 31, 1997............................ F-28
Statements of Operations for the Six Month Periods Ended
December 31, 1997 and June 30, 1997 and for the Year
Ended December 31, 1996....................................... F-29
Statements of Changes in Partners' Capital for the Two
Years Ended December 31, 1997................................. F-30
Statements of Cash Flows for the Six Months Ended
December 31, 1997 and June 30, 1997 and for the Year
Ended December 31, 1996....................................... F-31
Notes to Financial Statements.................................... F-33
</TABLE>
<PAGE> 168
Independent Auditors' Report
Board of Directors and Stockholders
Middle Bay Oil Company, Inc.
We have audited the accompanying consolidated balance sheets of Middle
Bay Oil Company, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related statements of operations, changes in stockholders' equity and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We have conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Middle Bay
Oil Company, Inc. and subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company
restated its consolidated financial statements to exclude a valuation allowance
in presenting its net deferred income tax liability.
Jackson Mississippi
February 27, 1998
F-1
<PAGE> 169
MIDDLE BAY OIL COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,587,184 $ 556,026
Accounts receivable 2,325,138 1,129,417
Other current assets 104,313 58,137
Assets held for resale 206,464 --
----------- -----------
Total current assets 4,223,099 1,743,580
NON-CURRENT ASSETS
Accounts receivable - stockholder (Note 3) 166,165 159,215
PROPERTY (at cost)(substantially pledged) (Notes 1&4)
Oil and gas (successful efforts method) 62,654,347 16,252,576
Other 837,205 354,603
----------- -----------
63,491,552 16,607,179
Less accumulated depletion, depreciation
and amortization (30,636,202) (5,332,517)
----------- -----------
32,855,350 11,274,662
OTHER ASSETS 7,958 7,523
----------- -----------
TOTAL ASSETS $37,252,572 $13,184,980
=========== ===========
</TABLE>
F-2
<PAGE> 170
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long term debt (Note 4) $ 1,375,537 $ 554,601
Accounts payable - trade 1,176,680 381,870
Royalties payable 212,622 4,720
Other current liabilities 126,092 16,206
------------ ------------
Total current liabilities 2,890,931 957,397
LONG TERM DEBT (Note 4) 9,714,713 5,158,477
DEFERRED INCOME TAXES (Notes 1 & 5) 4,780,528 610,785
REDEEMABLE COMMON STOCK (Note 8) -- 421,179
STOCKHOLDERS' EQUITY
Preferred stock, $.02 par, 5,000,000 shares
authorized with 1,666,667 shares designated
Series A, none other issued -- --
Cumulative convertible Series A 8%
preferred stock, $6 stated value, 1,666,667 designated,
1,666,667 and 166,667 shares issued and
outstanding at 12/31/97 and 12/31/96,
respectively, $10,000,000 aggregate liquidation
preference 10,000,000 1,000,000
Convertible preferred stock Series B, $7.50 stated
value, 266,667 shares issued and outstanding at
12/31/97. $2,000,000 aggregate liquidation
preference 3,627,000 --
Common stock, $.02 par value, 10,000,000 authorized,
4,519,206 and 1,880,917 shares issued and outstanding
at 12/31/97 and 12/31/96, respectively 90,392 37,618
Additional paid-in capital 23,029,299 6,049,442
Less redeemable common stock -- (421,179)
Unearned stock compensation (67,500)
Accumulated deficit (16,744,751) (560,699)
Less cost of treasury stock; 21,773 shares at
12/31/97 and 12/31/96 (68,040) (68,040)
------------ ------------
Total stockholders' equity 19,866,400 6,037,142
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 9)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,252,572 $ 13,184,980
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 171
MIDDLE BAY OIL COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $(15,579,340) $ 205,500
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Depletion, depreciation and amortization 4,567,065 1,184,713
Impairments 21,147,823 277,483
Deferred income taxes (7,451,249) 69,792
Bad debt expense 45,000 --
Unearned stock compensation 202,500 --
Gain on sale of assets (7,018) (37,814)
Changes in operating assets and liabilities:
(Increase) Decrease in receivables 243,777 (14,487)
Decrease in payables (438,355) (303,457)
Other (147,928) 7,646
------------ ------------
Net cash provided by operating activities 2,582,275 1,389,376
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for acquisition of NPC Energy Corp.,
net of cash acquired of $633,712 -- (651,016)
Payment for acquisition of Bison Energy Corp.,
net of cash acquired of $994,367 (7,139,914) --
Payment for acquisition of Shore Oil Company
net of cash acquired of $2,057,467 (514,299) --
Capital expenditures:
Oil and gas properties (7,056,213) (1,596,966)
Office building and other (246,735) (8,188)
Proceeds from sales of:
Oil and gas properties 103,872 40,000
Timberland -- 75,000
Other 1,445,890 --
Advances to stockholders - net (6,950) (26,668)
------------ ------------
Net cash used in investing activities (13,414,349) (2,167,838)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of bank loans 5,769,705 529,596
Principal payments on loans (2,497,533) (207,859)
Proceeds from issuance of preferred stock 9,000,000 1,000,000
Preferred stock dividends (604,712) --
Proceeds from common stock 195,772 --
Purchases of treasury stock -- (68,040)
------------ ------------
Net cash provided by financing activities 11,863,232 1,253,697
</TABLE>
F-4
<PAGE> 172
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
NET INCREASE IN CASH AND CASH EQUIVALENTS
FOR THE YEAR 1,031,158 475,235
Cash and cash equivalents - Beginning of year 556,026 80,791
------------ ------------
Cash and cash equivalents - End of year $ 1,587,184 $ 556,026
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest $ 671,081 504,945
============ ============
Income Taxes $ 6,451 5,079
============ ============
Non-cash investing and financing activities:
Common stock issued in acquisition of
NPC Energy Corp. $ -- $ 1,967,00
============ ============
Conversion of redeemable common stock to common
stock (net of treasury shares acquired) $ 421,179 $ 363,423
============ ============
Common stock issued in acquisition of
Bison Energy Corp. $ 3,330,559 $ --
============ ============
Common stock issued in acquisition of
Shore Oil Company $ 12,976,165 $ --
============ ============
Preferred stock Series B issued in acquisition of
Shore Oil Company $ 3,627,000 $ --
============ ============
Debt assumed in acquisition of Shore Oil Company $ 2,105,000 $ --
============ ============
Common stock issued in property acquisition $ 260,130 $ --
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 173
MIDDLE BAY OIL COMPANY. INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996
---- ----
<S> <C> <C>
REVENUES
Oil and gas sales $ 10,213,047 $ 4,474,786
Gain on sale of oil and gas properties 7,018 37,815
Delay rental and lease bonus income 975,347 --
Other 237,583 373,820
------------ ------------
Total revenue 11,432,995 4,886,421
COSTS AND EXPENSES
Operating expenses, including production taxes 3,848,627 1,516,011
Geological and geophysical costs 222,608 --
Abandonment costs 1,118,838 428,598
Impairments 21,147,823 277,483
Depletion, depreciation and amortization 4,567,063 1,184,713
Interest 671,081 504,945
Stock compensation expense 202,500 --
General and administrative 2,361,124 662,288
Other 317,469 32,012
------------ ------------
Total expenses 34,457,133 4,606,050
(LOSS) INCOME BEFORE INCOME TAX
(BENEFIT) EXPENSE (23,024,138) 280,371
INCOME TAX (BENEFIT) EXPENSE (Note 5)
Current 6,451 5,079
Deferred (7,451,249) 69,792
------------ ------------
(7,444,798 74,871
------------ ------------
NET (LOSS) INCOME $(15,579,340) $ 205,500
Dividends to preferred stockholders (604,712) --
------------ ------------
NET (LOSS) INCOME AVAILABLE TO
STOCKHOLDERS $ (16,184,52) $ 205,500
============ ============
NET (LOSS) INCOME PER SHARE
Basic $ (4.76) $ 0.15
============ ============
Diluted $ (4.76) $ 0.14
============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Basic 3,397,117 1,332,141
============ ============
Diluted 3,397,117 1,449,855
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 174
MIDDLE BAY OIL COMPANY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Preferred Stock Common
Series A Series B Stock
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE- 1/1/96 -- $ -- $ -- $1,318,917 $ 26,378
Common stock issued in
acquisition of NPC Energy
Corporation -- -- -- -- 562,000 11,240
Preferred stock issued 166,667 1,000,000 -- -- -- --
Conversion of redeemable
common stock to common
stock -- -- -- -- -- --
Net income -- -- -- -- -- --
Treasury stock acquired -
21,773 shares -- -- -- -- -- --
--------- ----------- --------- ----------- ---------- --------
BALANCE- 12/31/96 166,667 1,000,000 -- -- 1,880,917 37,618
Common stock issued in
acquisition of NPC Energy
Corporation -- -- -- -- 33,463 677
Preferred Series A issued 1,500,000 9,000,000 -- -- -- --
Common stock issued in
acquisition of Bison Energy
Corporation -- -- -- -- 605,556 12,111
Common stock issued in
acquisition of Shore Oil
Company -- -- -- -- 1,883,333 37,667
Preferred Series B issued
in acquisition of
Shore Oil Company -- -- 266,667 3,627,000 -- --
Conversion of redeemable
common stock to common
stock -- -- -- -- -- --
Restricted stock awards -- -- -- -- 49,091 982
Stock options exercised -- -- -- -- 40,833 817
Purchase of oil and gas
working interests -- -- -- -- 26,013 520
Unearned stock
compensation
Net loss
8% Preferred stock Series
A dividends -- -- -- -- -- --
--------- ----------- --------- ----------- ---------- --------
BALANCE- 12/31/97 1,666,667 $10,000,000 266,667 $ 3,627,000 4,519,206 $ 90,392
</TABLE>
F-7
<PAGE> 175
<TABLE>
<CAPTION>
Additional Redeemable Unearned
Paid-in Common Stock Accumulated Treasury
Capital Stock Compensation Deficit Stock Total
----------- ---------- ------------ ------------ ---------- -----
<S> <C> <C> <C> <C> <C>
$ 4,093,682 $ (852,642) $ -- $ (766,199) $ -- $ 2,501,219
1,955,760 -- -- -- -- 1,967,000
-- -- -- -- -- 1,000,000
-- 431,463 -- -- -- 431,463
-- -- -- 205,500 -- 205,500
-- -- -- -- (68,040) (68,040)
------------ ---------- ------- ------------- ----------- ------------
6,049,442 (421,179) -- (560,699) (68,040) 6,037,142
93,018 -- -- -- -- 93,695
-- -- -- -- -- 9,000,000
3,318,447 -- -- -- -- 3,330,558
12,938,498 -- -- -- -- 12,976,165
-- -- -- -- -- 3,627,000
-- 421,179 -- -- -- 421,179
269,018 -- -- -- -- 270,000
101,266 -- -- -- -- 102,083
259,610 -- -- -- -- 260,130
-- -- (67,500) -- -- (67,500)
-- -- -- (15,579,340) -- (15,579,340)
-- -- -- (604,712) -- (604,712)
------------ --------- ---------- ------------ ---------- ------------
$ 23,029,299 $ -- $ (67,500) $ (16,744,751) $ (68,040) $ 19,866,400
============ ========= ========== ============= ========== ============
</TABLE>
F-8
<PAGE> 176
MIDDLE BAY OIL COMPANY, INC,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
Organization
Middle Bay Oil Company, Inc. (the Company), was incorporated under the
laws of the state of Alabama on November 20, 1992. On December 31, 1996, the
Company acquired NPC Energy Corporation, and during 1997, the Company acquired
Bison Energy Corporation and Shore Oil Company (See Note 2). The Company is
engaged in the acquisition, development and production of oil and natural gas in
the contiguous United States.
Significant Accounting Policies
The Company's accounting policies reflect industry standards and
conform to generally accepted accounting principles. The more significant of
such policies are described below.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
Restatement of the 1997 Financial Statements
In 1998, the Company restated its 1997 financial statements to
correctly state deferred income taxes for improper inclusion of a valuation
allowance for deferred income taxes. This restatement resulted in an adjustment
decreasing the net loss and net loss available to stockholders by $1,125,542.
The net loss per share decreased $.34 as a result of the restatement.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company classifies
all cash investments with original maturities of three months or less as cash.
Oil and Gas Property
The Company follows the successful efforts method of accounting for oil
and gas properties, and accordingly, capitalizes ad direct costs incurred in
connection with the acquisition, drilling and development of productive oil and
gas properties. Costs associated with unsuccessful exploration are charged to
expense currently. Geological and geophysical costs and costs of carrying and
retaining unevaluated properties are charged to expense. Depletion,
F-9
<PAGE> 177
depreciation and amortization of capitalized costs are computed separately for
each property based on the unit of production method using only proved oil and
gas reserves. In arriving at such rates, commercially recoverable reserves have
been estimated by independent petroleum engineering firms. The Company reviews
its undeveloped properties continually and charges them to expense on a property
by property basis when it is determined that they have been condemned by dry
holes, or will not be retained, sold or drilled upon.
Site Restoration, Dismantlement and Abandonment Costs
Site restoration, dismantlement and abandonment costs (P&A costs) are
common in the oil and gas industry in which the Company conducts operations. P&A
costs are costs associated with removing the facilities and equipment required
to operate a well and restoring the well site to specified conditions. P&A
procedures are governed by federal and state regulations and contractual
obligations. P&A costs are incurred when the oil and gas reserves of a well or
wells are depleted or when production drops to the point that it is no longer
economically feasible to produce.
The Company, in conjunction with its independent engineers and the
operators of the wells, continually reviews its working interests with respect
to potential P&A costs. When conditions require that a well be plugged and
abandoned, the appropriate accounting procedures are followed. When a well, or
the last well of a group of proved properties ceases to produce or is no longer
economically feasible to produce, the entire cost related to the well or group
of wells, which includes estimated future dismantlement and abandonment cost, is
written off and gain or loss is recognized. Any additional liabilities arising
from P&A costs, net of salvage value of the equipment, are accrued in the
financial statements and charged to expense in the current period.
P&A costs are considered in the proved oil and gas reserve estimates as
disclosed in Note 11 - Supplemental Oil and Gas Reserve Information; and, if
material, the present value of the reserves is reduced accordingly.
As of December 31, 1997 and 1996, the P&A costs accrued were
immaterial.
Impairment of Long Lived Assets
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long Lived Assets and for Long Lived Assets to be disposed of"
(SFAS No. 121) was issued in March 1995. This statement requires that long lived
assets be reviewed for impairment when events or changes in circumstances
indicate that the carrying value of such an asset may not be recoverable. This
review consists of a comparison of the carrying value of the asset to the
asset's expected future undiscounted cash flows without interest costs.
Estimates of expected future cash flows represent management's best
estimate based on reasonable and supportable assumptions and projections. If the
expected future cash flows are less than the carrying value of the asset, an
impairment exists and is measured as the excess of the carrying value over the
estimated fair value of the asset. Any impairment provisions recognized in
accordance with SPAS No. 121 are permanent and may not be restored in the
future.
F-10
<PAGE> 178
In the fourth quarter of 1997 and 1996 the Company's proved properties
were assessed for impairment on an individual field basis and the Company
recorded impairment provisions of $21,147,823 and $277,483 respectively,
attributable to certain producing properties.
Prior to the adoption of SFAS No. 121, the Company assessed its proved
oil and gas properties on an individual field basis using management's best
estimate of the expected future cash flows from the producing properties.
Other Property and Equipment
Property and equipment are stated at cost and depreciation is computed
on the accelerated method over appropriate lives ranging from five to seven
years. Additions and betterments which provide benefits to several periods are
capitalized.
Environmental Liabilities
Environmental expenditures that relate to current or future revenues
are expensed or capitalized as appropriate. Expenditures that relate to an
existing condition caused by past operations, and do not contribute to current
or future revenue generation, are expensed. Liabilities are recorded when
environmental assessments and/or clean-ups are probable, and the costs can be
reasonably estimated. Generally, the timing of these accruals coincides with the
Company's commitment to a formal plan of action.
Revenue
Oil and gas revenues are recorded using the sales method, whereby the
Company recognizes revenues based on the amount of oil and gas sold to
purchasers on its behalf.
Income Taxes
The Company uses the asset and liability method of accounting for
income taxes required by the Statement of Financial Accounting Standards No.
109. Under the asset and liability method, deferred tax assets and liabilities
are determined by applying enacted statutory tax rates applicable to future
years to the difference between the financial statement and tax basis of assets
and liabilities.
Stock Based Compensation
In October 1995, The Financial Accounting Standards Board ("FASB")
issued SFAS No. 123, "Accounting for Stock Based Compensation", which
establishes financial accounting and reporting standards for stock based
compensation plans. Effective for fiscal years beginning after December 31,
1995, the statement provides the option to continue under the accounting
provisions of APB No. 25, while requiring proforma footnote disclosures of the
effects of net income and earnings per share, calculated as if the new method
had been implemented. The Company has adopted the financial reporting provisions
of SFAS No. 123 for 1997, but will continue under the accounting provisions of
APB Opinion 25.
F-11
<PAGE> 179
Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities to prepare the
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
Earnings Per Share
Effective December 31, 1997, the Company adopted SFAS No. 128,
"Earnings per Share." This statement establishes standards for computing and
presenting earnings per share, and requires, among other things, dual
presentation of basic and diluted earnings per share on the face of the
statement of operations. In accordance with SFAS No. 128, earnings per share and
weighted average shares outstanding have been restated to conform to this
statement for all periods presented.
Concentrations of Market Risk
The future results of the Company will be affected by the market prices
of oil and natural gas. The availability of a ready market for natural gas and
oil in the future will depend on numerous factors beyond the control of the
Company, including weather, production of other natural gas and crude oil,
imports, marketing of competitive fuels, proximity and capacity of oil and gas
pipelines and other transportation facilities, any oversupply or undersupply of
gas and oil, the regulatory environment, and other regional and political
events, none of which can be predicted with certainty.
Concentrations of Credit Risk
Financial instruments which subject the Company to concentrations of
credit risk consist primarily of cash and accounts receivable. The Company
places its cash investments with high credit qualified financial institutions.
Risk with respect to receivables is concentrated primarily in the current
production revenue receivable from multiple oil and gas producers, both major
and independent, and is typical in the industry. The Company sold oil and gas
representing approximately 14% of its total production to one customer, Warren
Petroleum, for the year ended December 31, 1997.
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." This statement establishes
standards for reporting and display of comprehensive income and its components
in the Company's financial statements. Comprehensive income includes all changes
in the Company's equity except investments by and distributions to owners and
includes, among other things, foreign currency translation adjustments. In June
1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments be included in
interim reports issued to shareholders. Both of these statements are effective
for financial statements for periods beginning after
F-12
<PAGE> 180
December 15, 1997. As both SFAS Nos. 130 and 131 establish standards for
reporting and display, the Company does not expect the adoption of these
statements to have a material impact on its financial condition or results of
operations.
(2) ACQUISITIONS
On December 31, 1996, the Company completed the acquisition of NPC
Energy Corporation ("NPC"). The transaction consisted of a merger (the "NPC
Merger") of NPC into the Company and its separate corporate existence ceased.
The cost of acquiring NPC was approximately $3.20 million, consisting
of the following (in thousands):
<TABLE>
<S> <C>
Estimated fair value of 562,000 shares
of MBOC common stock issued.................. $ 1,967
Cash consideration ............................ 1,226
Legal and accounting expenses ................. 35
-------
$ 3,228
=======
</TABLE>
The fair value of the securities issued in connection with the NPC Merger was
calculated assuming the price of the Company's common stock was $3.50 per share.
The Company's purchase price was allocated to the assets and
liabilities of NPC based on estimates of the fair values with the remaining
purchase price allocated to proved oil and gas properties. No goodwill was
recorded in this transaction.
The allocation of the purchase price is summarized as follows: (in
thousands)
<TABLE>
<S> <C>
Working capital ................................. $ 775
Oil and gas properties (proved) ................. 3,378
Debt assumed .................................... (385)
Deferred income taxes ........................... (540)
-------
$ 3,228
=======
</TABLE>
On February 28, 1997, the Company completed the acquisition of Bison
Energy Corporation ("BEC"). The transaction consisted of a merger (the "Bison
Merger") of BEC into Bison Energy Corporation-Alabama, a wholly-owned subsidiary
of the Company. On February 28, 1997, Bison Energy Corporation-Alabama merged
into BEC and its separate corporate existence ceased. BEC continues as a
wholly-owned subsidiary of the Company.
F-13
<PAGE> 181
The cost of acquiring BEC was approximately $10 million, consisting of
the following (in thousands):
<TABLE>
<S> <C>
Estimated fair value of 605,556 shares
of MBOC common stock issued .......................... $ 3,330
Cash consideration ..................................... 6,654
Legal and accounting expenses .......................... 35
--------
$ 10,019
========
</TABLE>
The fair value of the securities issued in connection with the merger
was calculated using the price of the Company's common stock at the time the
Bison Merger was announced to the public of $5.50 per share.
The Company's purchase price was allocated to the consolidated assets
and liabilities of BEC based on estimates of the fair values with the remaining
purchase price allocated to proved oil and gas properties. No goodwill was
recorded in this transaction.
The allocation of the purchase price is sums as follows: (in thousands)
<TABLE>
<S> <C>
Working capital ........................................ $ 714
Oil and gas properties (proved)......................... 13,268
Yard equipment ......................................... 465
Deferred income taxes .................................. (4,428)
$ l0,019
========
</TABLE>
The price paid for BEC and the allocation of the purchase price, both
detailed above, excludes the $1,445,890 allocated to non-oil and gas assets that
were purchased in the merger and sold on March 3, 1997 for S1,445,890.
On June 30, 1997, the Company completed the acquisition of Shore Oil
Company Shore"). The transaction consisted of a merger (the "Shore Merger") of
Shore into Shore Acquisition Company Inc., a wholly-owned subsidiary of the
Company. On June 30, 1997, Shore Acquisition Company merged into Shore and its
separate corporate existence ceased. Shore continues as a wholly-owned
subsidiary of the Company.
The cost of acquiring Shore was approximately $19 million, consisting
of the following (in thousands):
<TABLE>
<S> <C>
Estimated fair value of 1,883,333 shares
of MBOC common stock issued .......................... $ 12,976
Estimated fair value of 266,667 shares
of MBOC Series B preferred stock...................... 3,627
Cash consideration ..................................... 2,533
Legal and accounting expenses .......................... 38
---------
$ 19,174
=========
</TABLE>
The fair value of the securities issued in connection with the merger
was calculated using the average price of the Company's common stock at the time
the Shore Merger was announced to the public and further adjusted for
F-14
<PAGE> 182
tradability restrictions. An independent valuation firm determined the
tradability discount for the Company's common stock.
The Company's purchase price was allocated to the consolidated assets
and liabilities of Shore based on estimates of the fair values with the
remaining purchase price allocated to proved and unproved oil and gas
properties. No goodwill was recorded in this transaction.
The allocation of the purchase price is summarized as follows: (in
thousands)
<TABLE>
<S> <C>
Working capital.............................................. $ 2,288
Oil and gas properties (proved and unproved)................. 20,688
Fee minerals................................................. 5,495
Debt assumed................................................. (2,105)
Deferred income taxes ....................................... (7,192)
--------
$ 19,174
</TABLE>
The following pro forma data presents the results of the Company for
the twelve months ended December 31, 1997 and 1996, as if the acquisitions of
NPC, BEC and Shore had occurred on January 1, 1996. The pro forma results are
presented for comparative purposes only and are not necessarily indicative of
the results which would have been obtained had the acquisitions been consummated
as presented. The following data reflect pro forma adjustments for oil and gas
revenues, production costs, depreciation and depletion related to the properties
and businesses acquired, preferred stock dividends on preferred stock issued,
and the related income tax effects (in thousands, except per share amounts).
<TABLE>
<CAPTION>
Pro Forma (Unaudited)
1997 1996
---------- -----------
<S> <C> <C>
Total revenues ......................................... $ 14,753 $ 15,068
Net loss ............................................... (22,466) (946)
Loss per diluted share ................................. (6.61) (0.65)
</TABLE>
(3) RELATED PARTY TRANSACTIONS
The Company had a note receivable from Bay City Energy Group, Inc.
(successor entity to Bay City Minerals, Inc., effective September 26, 1995) a
significant stockholder, as of December 31, 1997 and 1996 in the amount of
$166,165 and $159,215 respectively. The principal balance of the note accrues
interest at 5% annually and is due January 1, 2001. The note is secured by
75,000 shares of Company common stock. Bay City Energy Group, Inc. made no cash
payments to the Company and was advanced $26,668 during the year ended December
31, 1996. Interest of $27,160 was accrued on the note as of December 31, 1997.
The Company rents office space from C.J. Lett III, a shareholder,
officer and director of the Company. The rent is $3,000 per month for three
years through February, 2000.
F- 15
<PAGE> 183
Gary R Christopher, a shareholder and director of the Company, is
employed by Kaiser-Francis Oil Co., which owns approximately 43% of the common
stock of the Company.
(4) LONG-TERM DEBT
Long-term debt at December 31,1997 and 1996, consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Convertible Loan for $50,000,000 due March 31, 1998,
secured by oil and gas properties, monthly payments
of interest only at LIBOR plus 1.75%, convertible
into a 72 month term note on March 31, 1998 $ 10,956,298 $ --
Convertible loan for $6,000,000 due September 30, 1997,
Secured by oil and gas properties, monthly payments of
interest only at 1.5% over prime, convertible into a 72
month term note on September 30, 1997 -- 5,186,596
Term note due August 31,1998, secured by oil and gas
properties, repayable in monthly installments of $27,590
plus interest at 9.5% -- 385,089
Note, due 1/1/99, secured by office building, repayable in
monthly installments of $1,511 including interest at 7 3/4% 133,952 141,393
------------- ------------
Total 11,090,250 5,713,078
Less current maturities (1,375,537) (554,601)
------------- ------------
Long term debt excluding current maturities $ 9,714,713 $ 5,158,477
============= ============
</TABLE>
On April 3, 1996, the Bank concerted its $5.6 million term note into a
$6.0 million, one-year, revolving line-of-credit (the "$6 million Convertible
Loan"), effective April 1, 1996. The $6 million Convertible Loan required
monthly payments of interest only at prime plus 1.5% and converted into a term
note payable in seventy-one consecutive equal monthly principal and interest
payments at prime plus 1.5%, with the remaining principal and interest payment
due on March 31, 2003. Effective March 31, 1997, the Company refinanced the $6
million Convertible Loan at its current principal balance of $5,186,596 with a
$15 million Convertible Loan. The $15 million Convertible Loan required monthly
payments of interest only at prime for one year and converts into a term note
payable in seventy-one consecutive equal monthly principal and interest payments
at prime, with the remaining principal and interest payment due on March
31, 2004. The $15 million Convertible Loan also required payment of a commitment
fee equal to an annual rate of three-eighths percent of the excess of the
Borrowing Base over the
F-16
<PAGE> 184
principal balance of the convertible note. Effective August 25, 1997, the
Company refinanced the $15 million Convertible Loan at its current principal
balance of $5,851,298 with a $50 million Convertible Loan. The $50 million
Convertible Loan requires monthly payments of interest only at a fixed rate of
Libor plus 1.75% as long as the principal amount of the loan is less than 75% of
the current borrowing base of $15 million. If the principal amount of the loan
is greater than or equal to 75% of the borrowing base the rate increases to
Libor plus 2.00%. The Company has the option of switching to a floating prime
rate. The $50 million Convertible Loan converts into a term note payable in
seventy-one consecutive equal monthly principal and interest payments at prime,
with the remaining principal and interest payment due on March 31, 2004. The $50
million Convertible Loan also requires payment of a commitment fee equal to an
annual rate of three-eighths percent of the excess of the Borrowing Base over
the principal balance of the convertible note. The principal balance of the $50
million Convertible Loan at December 31, 1997 was $10,956,298.
The initial borrowing base of the $50 million Convertible Loan at
closing on August 25, 1997, was $15 million. The borrowing base will be
redetermined on March 31 and September 30, commencing September 30, 1997, by the
Bank's engineers or any other independent engineer using the Bank's pricing and
discount factors and the future net revenue expected to be produced from the
Company's oil and gas reserves. If at any time during the period of the
Convertible Loan (and the period subsequent to the conversion to the term note)
the collateral borrowing base, as determined by the Bank, should be less than
the aggregate unpaid principal balance of the note, the collateral deficiency
shall be cured by making a cash prepayment on the note in the amount of the
deficiency or by increasing the monthly principal payments for the next six
months to reduce the principal balance to the projected borrowing base as of the
next semiannual redetermination date.
The $50,000,000 convertible loan contains certain restrictive
provisions the most significant of which restricts additional borrowings, either
directly or indirectly, and payment of dividends. At December 31, 1997, the
Company was in compliance with all covenants specified in the agreement.
Aggregate amounts of expected required repayments of long term debt at
December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 1,375,537
1999 1,954,001
2000 1,826,050
2001 1,826,050
2002 1,826,050
Thereafter 2,282,562
-----------
$11,090,250
</TABLE>
F-17
<PAGE> 185
(5) INCOME TAXES
Income tax (benefit) expense for the years ended December 31 consisted
of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current $ 6,451 $ 5,079
Deferred (7,451,249) 69,792
----------- --------
Total $(7,444,798) $ 74,871
=========== ========
</TABLE>
The reconciliation of income tax computed at the U.S. federal statutory
tax rates to the provision for income taxes is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Income tax (benefit) expense at statutory rate $ (7,828,207) $ 92,595
Increase (decrease) due to effect of graduated tax rates 96,853 (96,740)
Increase due to state taxes and other 286,556 79,016
------------- ---------
Income tax (benefit) expense $ (7,444,798) $ 74,871
============= =========
</TABLE>
The Company's net deferred tax liability at December 31, 1997 and 1996
is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax liability
Oil and Gas Properties $ 5,906,070 $ 817,079
Deferred tax asset
NOL carryforward (1,083,324) (164,076)
AMT tax credit carryforward (36,482) (36,482)
Other (5,736) (5,736)
----------- ---------
(1,125,542) (206,294)
Valuation allowance -- --
----------- ---------
Net deferred tax liability $ 4,780,528 $ 610,785
=========== =========
</TABLE>
As of December 31, 1997, the Company had net operating loss
carryforwards of $3,186,247 expiring in the years 2009 through 2011.
F-18
<PAGE> 186
(6) RETIREMENT PLAN
All of the employees of the Company participate in a defined
contribution plan which provides for a maximum discretionary Company
contribution of 15% of total wages paid to employees for the year. The Company
contributed $51,560 and $5,000 to the plans for the years ended December 31,
1997 and 1996, respectively.
(7) STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN
At December 31, 1997, the Company had one fixed stock option plan, the
1995 Stock Option and Stock Appreciation Rights Plan (1995 Plan). The Company
applies APB Opinion 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for the plan; accordingly, no compensation cost
has been recognized. Had compensation cost for the Company's 1995 Plan been
determined based on the fair value at the grant date for stock options granted
during 1997 and 1996 consistent with the method of FASB Statement 123,
"Accounting for Stock Based Compensation"' the Company's net income and earnings
per share would have been reduce to the pro forma amounts listed below:
<TABLE>
<CAPTION>
1997 1996
------------ ---------
<S> <C> <C> <C>
Net (Loss) Income As Reported $(16,184,052) $ 205,500
Pro Forma (16,463,666) 189,657
Basic (loss) earnings per share As Reported $ (4.76) $ 0.15
Pro Forma (4.85) 0.14
Diluted (loss) earnings per share As Reported $ (4.76) $ 0.14
Pro Forma (4.85) 0.13
</TABLE>
The fair value of each option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
the grants in 1997 and 1996; no dividend yield; expected volatility of 60
percent and 50 percent, respectively; risk-free interest rate of 6.06% and
6.38%, respectively; and expected life of 3 years. At December 31, 1997, the
range of exercise prices and weighted average remaining contractual life of
options outstanding was $2.50 and $7.00 and 9.06 years, respectively.
The 1995 Plan
At December 31, 1997 there were 80,000 shares of common stock available
for grant under the 1995 plan. All of the options granted under the 1995 Plan
have an exercise price equal to the fair market value of the Company's common
stock at the date of the grant and expire ten (10) years from the date of grant
if not exercised. All of the options granted under the 1995 Plan are 100% vested
The 1995 Plan is administered by the Compensation Committee of the Board of
Directors.
Information relating to stock options is summarized below:
F-19
<PAGE> 187
<TABLE>
<CAPTION>
Exercise Price
------------------------------
Shares Per Share
------- ---------
<S> <C> <C>
Options outstanding at January 1, 1996................................... - -
Granted.................................................................. 125,000 $2.50
------- -----
Options outstanding at December 31, 1996................................. 125,000 $2.50
Granted.................................................................. 520,000 $6.07
Exercised................................................................. 40,833 $2.50
------- -----
Options outstanding at December 31, 1997..................................604,167 $5.57
Options exercisable at December 31, 1997................................. 604,167 $5.57
</TABLE>
Options to acquire 225,000 shares of the Company common stock at an
exercise price of $5.50 were granted outside of the 1995 Plan on February 13,
1997 to certain officers of the Company.
(8) CAPITAL STOCK
Preferred Stock
In connection with the merger with Shore Oil Company, effective June
30, 1997, the Company issued 266,667 shares of Series B Preferred Stock ("Series
B"). The Series B is nonvoting and pays no dividends. The Series B has a
liquidation value of $7.50 per share and is junior to the Series A Preferred.
For a period of sixty-six months subsequent to June 30, 1997 any holder of the
Series B may convert all or any portion of Series B shares into Company Common
Stock ("Common") at a ratio of one share of Common for each Series B share or at
any time on or after January 1, 1998, the holders may convert their Series B
Preferred shares based on a conversion method whereby the number of convertible
Series B Preferred shares is calculated as the increase in value of
approximately 40,000 acres of mineral interest owned by Shore at the end of the
year divided by $8,000,000 and multiplied by 266,667 shares. Each of the
convertible Series B Preferred shares is then multiplied by 1,066,000 to arrive
at the potential converted number of common shares. Upon expiration of the
conversion period, unless the Company has given notice to redeem the Series B,
all of the shares of Series B shall be automatically converted. In no event
shall the aggregate total number of shares of Common into which the Series B are
converted be less than 266,667 shares or exceed 1,333,333 shares, unless further
increased for any anti-dilution provisions.
On September 4, 1996, the Company signed a stock purchase agreement
with Kaiser Francis Oil Company ("the Agreement"). Kaiser-Francis has agreed to
purchase 1,666,667 shares of Series A Preferred Stock ("Series A") at $6.00 per
share, for a total investment of $10,000,000. The parties agreed to a five-year
purchase period, effective September 4, 1996, with minimum incremental
investments of $500,000 each. Each issuance of Series A is subject to approval
by Kaiser-Francis of the use of proceeds. The Series A is nonvoting and accrues
dividends at 8% per annum, payable quarterly in cash. The Series A is
convertible at any time after issuance into shares of common stock at the rate
of two shares of common stock for each share of Series A before January 1, 1998.
The conversion rate
F-20
<PAGE> 188
decreases thereafter at 8% per annum. The Company will pay the costs of
registration of the Series A or the underlying common stock upon request of
Kaiser-Francis. The Company may redeem the Series A in whole or in part, at any
time after January 1, 2007 at a price of $6.00 per share. As of December 31,
1997, 1,666,667 shares of the Series A had been issued.
Common Stock
On April 1, 1996, the Board of Directors authorized the repurchase of
up to $100,000 of Company common stock at a price per share not to exceed $3.25,
exclusive of brokerage costs. As of December 31, 1997 the Company had purchased
21,773 shares of common stock at a cost of $68,040.
Under the terms of the Janex Acquisition in 1993, the Company had a
contingent obligation to repurchase 142,107 common shares issued in the Janex
Acquisition, upon written notice delivered to the Company, beginning five years
after the closing date and continuing for thirty days thereafter, at a price of
$6.00 per share. This obligation will terminate if the Comparers stock trades at
a share price of $8.00 or greater for twenty consecutive trading days during the
thirty-six month period ending November 1, 1998. At the close of trading on
April 7, 1997, the Company's common stock had traded at an ask price that was
equal to, or exceeded, $8.00 per share for twenty consecutive trading days.
Therefore, the contingent obligation represented by the redeemable common stock
balance on the Company's balance sheet in the amount of $421,179 was
reclassified to additional paid-in capital effective April 7, 1997.
On February 13, 1997, the Company awarded the President,
Vice-President/Chief Financial Officer and Vice-President of Engineering stock
options to acquire 100,000, 62,500 and 62,500 shares of common stock,
respectively, at an exercise price of $5.50 per share. All of the options vested
on the date of grant. The exercise price was equal to the fair market value of
common stock on the date of grant. On the same date, The Company awarded to the
President, Vice-President/Chief Financial Officer and Vice-President of
Engineering, 25,909, 11,591 and 11,591 shares of restricted stock of the
Company, respectively. The restricted stock awards are contingent on the
performance of services to the Company in the future with 50% of the restricted
shares being earned over the six month period July, 1997 to December 31, 1997
and 50% over the six month period January 1, 1998 to June 30, 1998. As of
December 31, 1997, 50% of the restricted stock awards had been earned.
On May 30, 1997, the Board of Directors granted options to acquire
85,000 shares of Company common stock under the 1995 Stock Option and Stock
Appreciation Rights Plan to certain key employees. All of the options vested on
the grant date of May 30, 1997 with an exercise price of $7.75 per share, which
was equal to the fair market value of common stock on the date of grant. The
options expire ten years from the date of grant if not exercised.
On February 6, 1997, the Board of Directors granted options to acquire
210,000 shares of Company common stock under the 1995 Stock Option and Stock
Appreciation Rights Plan to key employees and non-employee directors. All of the
options vested on the grant date of February 6, 1997 with an exercise price of
$6.00 per share, which was equal to the fair market value of common stock on the
date of grant. The options expire ten years from the date of grant if not
exercised.
On May 31, 1996, the Board of Directors granted options to acquire
125,000 shares of Company common stock under the 1995 Stock Option and Stock
Appreciation Rights Plan to key employees and non-employee directors.
F-21
<PAGE> 189
All of the options vested on the grant date of May 31, 1996 with an exercise
price of $2.50 per share, which was equal to the fair market value of common
stock on the date of grant. The options expire ten years from the date of grant
if not exercised.
Earnings Per Share
The following table provides a reconciliation between basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
Weight Average Per
Common Shares Share
Net (Loss)Income Outstanding Amount
---------------- -------------- -------
<S> <C> <C> <C>
Year Ended December 31, 1997:
Basic earnings per share $ (16,184,052) 3,397,117 $ (4.76)
Effect of dilutive stock options - - -
------------- ---------- -------
Diluted earnings per share $ (16,184,052) 3,397,117 $ (4.76)
============= ========== =======
Year Ended December 31, 1996 (restated):
Basic earnings per share $ 205,500 1,332,141 $ .15
Effect of dilutive stock options - 117,714 (.01)
------------- ---------- -------
Diluted earnings per share $ 205,500 1,449,855 $ .14
============= ========== =======
</TABLE>
At December 31, 1997, the Company had 604,167 stock options outstanding
with exercise prices ranging from $2.50 to $7.75 which were not included in the
computation of diluted earnings per share, because the effect of the assumed
exercise of these stock options would have an antidilutive effect on the
computation of diluted loss per share.
(9) COMMITMENTS AND CONTINGENCIES
The Company is obligated under the terms of certain operating leases
for office space that expire over the next three years. Total rent expense was
$97,588 and $12,144 for the years ended December 31, 1997 and 1996,
respectively. Future minimum rental payments under the Company's leases total
$149,658, $114,912, and $6,000 for 1998, 1999, and 2000, respectively.
On April 3, 1996, the Company entered into a Joint Expense and
Participation Agreement with Brigham Oil & Gas, L.P. which allowed the Company
to participate in the drilling of ninety-one (91) onshore wells in Texas and
Oklahoma over the twelve month period beginning April 1, 1996. The Company
committed to fund $1,500,000 in drilling costs over this twelve month period. As
of December 31, 1997, the Company had advanced $1,944,499 in drilling and
completion costs to Brigham Oil and Gas, L.P. The Company is no longer required
to advance any additional money under the Agreement.
F-22
<PAGE> 190
As of December 31, 1997, the Company is committed to pay approximately
$400,000 under various AFEs for work to be performed in 1998. The actual amounts
due may be higher or lower than the amounts estimated in the AFEs.
The Company is a defendant in various legal proceedings which are
considered routine litigation incidental to the Company's business, the
disposition of which management believes will not have a material effect on the
financial position or results of operations of the Company.
(10) SUBSEQUENT EVENTS
Recent Transactions
On January 31, 1998, Kaiser Francis Oil Company converted 100% of the
shares of the Series A Preferred stock into 3,333,334 common shares of the
Company.
On February 19, 1998, the Company commenced a cash tender offer for the
common shares of Enex Resources Corporation ("Enex") at a price of $15 per
share. As of February 10, 1998, there were 1,343,352 common shares of Enex
outstanding. On a diluted basis, there would be 1,486,352 shares outstanding.
The purpose of the tender offer is to acquire common shares that will represent
at least a majority of the outstanding common stock of Enex. The tender offer is
intended to result in the acquisition of 100% of Enex's outstanding common
stock. The tender offer is scheduled to expire on March 16, 1998, unless
extended. Enex is an independent oil and gas production and development company,
headquartered in Kingwood, Texas, with operations primarily in Texas. Enex
common stock trades on the NASDAQ National Market System.
(11) SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
CAPITALIZED COSTS AND COSTS INCURRED (UNAUDITED)
The following tables present the (1) capitalized costs related to oil
and gas producing activities and the related depreciation, depletion,
amortization and impairment and (2) costs incurred in oil and gas property
acquisition, exploration and development activities (in thousands).
<TABLE>
<CAPTION>
1997 1996
--------- --------
Capitalized Costs
-----------------
<S> <C> <C>
Proved properties $ 56,441 $ 15,561
Nonproducing leasehold 6,118 376
Support equipment facilities 95 315
Accumulated depreciation, depletion, amortization
and impairment (30,456) (5,237)
-------- --------
Net capitalized costs $ 32,198 $ 11,015
======== ========
</TABLE>
F-23
<PAGE> 191
<TABLE>
<CAPTION>
<S> <C> <C>
Costs Incurred
Proved properties $38,099 $ 3,402
Unproved properties 6,195 -
Exploration costs 1,912 1,453
Development costs 1,862 540
------- ------
Total $48,068 $ 5,395
======= =======
Depletion, depreciation, amortization
and impairment $25,651 $ 1,433
======= =======
</TABLE>
ESTIMATED QUANTITIES OF RESERVES (UNAUDITED)
The Company has interests in oil and gas properties that are located
principally in Alabama, Louisiana, Kansas, New Mexico, Oklahoma and Texas. The
Company does not own or lease any oil and gas properties outside the United
States. There are no quantities of oil and gas subject to long-term supply or
similar agreements with any governmental agencies.
The Company retains independent engineering firms to provide annual
year end estimates of the Company's future net recoverable oil, gas and natural
gas liquids reserves. The information for 1997 is based upon estimates prepared
by Lee Keeling and Associates, Inc., Cawley, Gillespie and Associates, Inc.,
Ryder Scott Company, Huddleston & Company, Inc., and DeGoyler & MacNaughton,
which were engaged to perform an evaluation of the Company's oil and gas
reserves. The information for 1996 was prepared by Lee Keeling and Associates,
Inc. and Cawley, Gillespie and Associates, Inc. The reserve information was
prepared in accordance with guidelines established by the Securities and
Exchange Commission. Estimated proved net recoverable reserves as shown below
include only those quantities that can be expected to be commercially
recoverable at prices and costs in effect at the balance sheet dates under
existing regulatory practices and with conventional equipment and operating
methods. Proved developed reserves represent only those reserves expected to be
recovered through existing wells. Proved undeveloped reserves include those
reserves expected to be recovered from new wells or on undrilled acreage or from
existing wells on which a relatively major expenditure is required for
recompletion.
Net quantities of proved developed and undeveloped reserves of natural
gas and crude oil, including condensate and natural gas liquids, are summarized
as follows:
F-24
<PAGE> 192
<TABLE>
<CAPTION>
Years Ended
December 31
--------------------------------------------------------------------
1997 1996
--------------------------- --------------------------------
Oil Gas Oil Gas
Proved Reserves (Barrels) (Mcf) (Barrels) (Mcf)
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Beginning of year 1,389,945 8,964,238 777,550 6,370,830
Revisions of previous estimates (205,733) (1,431,708) 157,099 44,543
Extensions and discoveries 22,520 705,020 76,492 392,275
Purchases of reserves in place 1,980,117 12,110,748 503,156 3,139,299
Sale of reserves in place -- -- (15,726) --
Production for the year (253,849) (1,929,298) (108,626) (982,709)
--------- ----------- ----------- ----------
End of year 2,933,000 18,419,000 1,389,945 8,964,238
========= =========== =========== ===========
Proved Developed Reserves
Beginning of year 1,266,421 8,142,820 770,334 6,306,604
========= =========== ========== ==========
End of year 2,580,000 14,251,000 1,266,421 8,142,820
========= =========== ========== ==========
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED RESERVES
(UNAUDITED)
The following is a summary of the standardized measure of discounted
future net cash flows related to the Company's proved oil and gas reserves. For
these calculations, estimated future cash flows from estimated future production
of proved reserves are computed using oil and gas prices as of the end of each
period presented. Future development and production costs attributable to the
proved reserves were estimated assuming that existing conditions would continue
over the economic lives of the individual leases and costs were not escalated
for the future. Estimated future income taxes were calculated by applying
statutory tax rates (based on current law adjusted for permanent differences and
tax credits) to the estimated future pre-tax net cash flows related to proved
oil and gas reserves, less the tax basis of the properties involved.
The Company cautions against using this data to determine the value of
its oil and gas properties. To obtain the best estimate of the fair value of the
oil and gas properties, forecasts of future economic conditions, varying
discount rates, and consideration of other than proved reserves would have to be
incorporated into the calculation. In addition, there are significant
uncertainties inherent in estimating quantities of proved reserves and in
projecting rates of production that impair the usefulness of the data.
The standardized measure of discounted future net cash flows relating
to proved oil and gas reserves are summarized as follows (in thousands):
F-25
<PAGE> 193
<TABLE>
<CAPTION>
Years Ended
December 31
------------------------
1997 1996
--------- --------
<S> <C> <C>
Future cash inflows $ 101,482 $ 61,813
Future production costs and development costs (54,358) (25,873)
Future income tax expenses (11,853) (7,361)
--------- --------
Future net cash flows 35,271 28,579
10% discount to reflect timing of cash flows (10,778) (10,716)
--------- --------
Standardized measure of discounted
future net cash flows $ 24,493 $ 17,863
========= ========
The following are the principal sources of changes in the standardized
measure of discounted future net cash flows (in thousands):
<CAPTION>
Years Ended
December 31
------------------------
1997 1996
--------- --------
<S> <C> <C>
Beginning of year $ 17,863 $ 9,250
Sales of oil and gas, net of production cost (6,364) (2,959)
Net changes in price and production cost (11,108) 8,521
Extensions and discoveries 851 1,966
Purchase of reserves 20,293 6,006
Sale of reserves -- (29)
Revisions of quantity estimates and other 1,794 (2,551)
Net change in income taxes (1,082) (3,382)
Accretion of discount 2,246 1,041
--------- --------
End of year $ 24,493 $ 17,863
========= ========
</TABLE>
During recent years, there have been significant fluctuations in the
prices paid for crude oil in the world markets. The situation has had a
destabilizing effect on the crude oil posted prices in the United States,
including the posted prices paid by purchasers of the Company's crude oil. The
year end prices of oil and gas at December 31, 1997 and 1996, used in the above
table were $16.18 and $24.50 per barrel of oil and $2.54 and $3.70 per thousand
cubic feet of gas, respectively.
F-26
<PAGE> 194
INDEPENDENT AUDITORS' REPORT
The Partners
Enex Consolidated Partners, L.P.:
We have audited the accompanying balance sheet of Enex Consolidated Partners,
L.P. (a New Jersey limited partnership) as of December 31, 1997 and the related
statements of operations, changes in partners' capital, and cash flows for Enex
Consolidated Partners, L.P. and the Predecessor Partnerships for the six month
periods ended December 31, 1997 and June 30, 1997 and the year ended December
31, 1996. These financial statements are the responsibility of the general
partner of Enex Consolidated Partners, L.P. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Enex Consolidated Partners, L.P. at December
31, 1997 and the results of its and the Predecessor Partnerships' operations and
cash flows for the six month periods ended December 31, 1997 and June 30, 1997
and the year ended December 31, 1996 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
March 25, 1998
F-27
<PAGE> 195
ENEX CONSOLIDATED PARTNERS, L.P.
BALANCE SHEET, DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS
1997
-----------
CURRENT ASSETS:
<S> <C>
Cash $ 1,142,439
Accounts receivable - oil & gas sales 1,265,870
Receivable from litigation settlement 338,860
Other current assets 5,340
-----------
Total current assets 2,752,509
OIL & GAS PROPERTIES:
(Successful efforts accounting method) - Proved
mineral interests and related equipment & facilities 11,543,205
Less accumulated depreciation and depletion 881,821
-----------
Property, net 10,661,384
-----------
TOTAL $13,413,893
===========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable $ 487,581
Payable to general partner 54,931
-----------
Total current liabilities 542,512
LIMITED PARTNERS' CAPITAL SUBJECT
TO REDEMPTION 12,800,246
GENERAL PARTNER CAPITAL 71,135
-----------
TOTAL $13,413,893
===========
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE> 196
ENEX CONSOLIDATED PARTNERS, L.P.
STATEMENTS OF OPERATIONS
FOR THE SIX MONTH PERIODS ENDED DECEMBER 31, 1997
AND JUNE 30, 1997 AND FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Enex Consolidated
Partners, L.P. Predecessor Partnerships
----------------- ---------------------------
Six Months Six Months Year Ended
Ended Ended December 31,
12/31/97 6/30/97 1996
---------- ---------- -----------
<S> <C> <C> <C>
REVENUES:
Oil and gas sales $4,803,498 $5,200,270 $11,296,811
Gas plant sales 537,513 619,555 1,048,688
Gain from sale of property 735,677 5,940 242,389
Other revenues -- 21,000 49
Interest income 72,583 1,265 8,800
---------- ---------- -----------
Total revenues 6,149,271 5,848,030 12,596,737
EXPENSES:
Depreciation and depletion 907,123 1,048,413 2,369,278
Impairment of property -- -- 2,315,081
Lease operating expenses 1,845,995 1,743,841 3,616,133
Gas purchases and expenses 369,966 439,370 670,358
Production taxes 279,740 288,581 637,476
General and administrative:
Allocated from general partner 512,258 758,298 1,646,201
Direct expense 282,316 58,349 329,800
Interest expense -- -- 2,498
---------- ---------- -----------
Total expenses 4,197,398 4,336,852 11,586,825
NET INCOME $1,951,873 $1,511,178 $ 1,009,912
========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE> 197
ENEX CONSOLIDATED PARTNERS, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE TWO YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Limited
Partners'
Capital
General Subject to
Total Partner Redemption
------------ ----------- ------------
<S> <C> <C> <C>
Predecessor Balance January 1, 1996 $ 15,984,697 $ 1,664,903 $ 14,319,794
Cash Distributions (2,744,270) (279,323) (2,464,947)
Net Income 1,009,912 342,661 667,251
------------ ----------- ------------
Balance, December 31, 1996 14,250,339 1,728,241 12,522,098
Cash Distributions (2,841,709) (512,192) (2,329,517)
Net Income 1,511,178 156,491 1,354,687
------------ ----------- ------------
Combined Historical Balance, June 30, 1997 12,919,808 1,372,540 11,547,268
Purchase Accounting Adjustments:
Adjustment to Record Property at Fair Market Value -- (1,561,322) (1,561,322)
Recognize Conversion of Payable to General Partner
to Limited Partner Capital -- 2,420,858 2,420,858
Recognize Conversion of General Partner Capital to
Limited Partner Capital -- (1,372,540) 1,372,540
Expenses of Consolidation -- (549,158) (549,158)
Cash Distributions (2,310,678) (46,240) (2,264,438)
Net Income 1,951,873 117,375 1,834,498
------------ ----------- ------------
Consolidated Balance, December 31, 1997 $ 12,871,381 $ 71,135 $ 12,800,246
============ =========== ============
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE> 198
ENEX CONSOLIDATED PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND JUNE 30, 1997
AND FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Predecessor Partnerships
-----------------------------
Six Months Ended Six Months Year Ended
December 31, Ended December 31,
1997 June 30. 1997 1996
---------------- ------------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,951,873 $ 1,511,178 $ 1,009,912
----------- ----------- -----------
ADJUSTMENT TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Depreciation and depletion 907,123 1,048,413 2,369,278
Impairment of property -- -- 2,315,081
Gain from sale of property (735,677) (5,940) (242,389
(INCREASE) DECREASE IN:
Accounts receivable - oil & gas sales 15,551 599,008 (699,380)
Other current assets (23,322) 172,568 23,729
INCREASE (DECREASE) IN:
Accounts payable (11,236) (401,102) 36,435
Payable to general partner 45,780 47,924 (1,348,665)
----------- ----------- -----------
TOTAL ADJUSTMENTS 198,219 1,460,871 2,454,089
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,150,092 2,972,049 3,464,001
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds Dom sale of properties 915,539 5,940 526,600
Proper additions - development costs (565,601) (106,789) (1,026,456)
----------- ----------- -----------
Net cash provided (used) by investing activities 349,938 (100,849) (499,856)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions (2,310,678) (2,841,709) (2,744,270)
----------- ----------- -----------
NET INCREASE IN CASH 189,352 29,491 219,875
CASH AT BEGINNING OF PERIOD 953,087 923,596 703,721
----------- ----------- -----------
CASH AT END OF PERIOD $ 1,142,439 $ 953,087 $ 923,596
=========== =========== ===========
</TABLE>
F-31
<PAGE> 199
<TABLE>
<S> <C> <C> <C>
NONCASH TRANSACTIONS RESULTING FROM THE
CONSOLIDATION
Decrease in accounts payable $ 1,871,700 -- --
Adjustment to record property at fair
market value $ 1,561,322 -- --
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE> 200
ENEX CONSOLIDATED PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
1. PARTNERSHIP ORGANIZATION
Enex Consolidated Partners, L.P. (the "Company") was formed under the
New Jersey Uniform Limited Partnership Law (1976) on June 30, 1997 from the
combination of thirty-four Enex Oil and Gas Limited Partnerships, consisting of
Enex Program I Partners, L.P., four partnerships in Enex Oil & Gas Income
Program II, the eight partnerships in Enex Oil & Gas Income Program III, six
partnerships in Enex Oil & Gas Income Program IV, the five partnerships in Enex
Oil & Gas Income Program V, Enex Oil & Gas Income Program Vl - Series 1, L.P.,
the three partnerships in Enex Income and Retirement Fund, three partnerships in
Enex 88-89 Income and Retirement Fund, and the three partnerships in Enex 90-91
Income and Retirement Fund (collectively the "Predecessor Partnerships").
The historical information presented in this Form 10-KSB consists of
the cumulative historical totals of the Predecessor Partnerships for the year
ended December 31, 1996 and for the six months ended June 30, 1997. The amounts
for the six months ended December 31, 1997 are the result of the operations of
the Company. The Consolidation created a new accounting basis in the carrying
value of property. Oil and gas property was written down by $1,561,322 from the
net carrying value of property in the combined Predecessor Partnerships.
Information relating to the allocation of costs and revenues between
Enex, as general partner, and the limited partners is as follows:
<TABLE>
<CAPTION>
Limited
Enex Partners
<S> <C> <C>
Commissions and selling expenses ................................ - 100%
Company reimbursement of organization expense ................... - 100%
Company property acquisition .................................... - 100%
General and administrative costs ................................ 4.1% 95.9%
Costs of drilling and completing development wells .............. 4.1% 95.9%
Revenues from temporary investment of partnership capital ....... - 100%
Revenues from producing properties .............................. 4.1% 95.9%
Operating costs (including general and administrative costs
associated with operating producing properties) ................ 4.1% 95.9%
</TABLE>
In addition to the above general partner interest, Enex has a 55.5008%
limited partner interest in the Company.
F-33
<PAGE> 201
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Oil and Gas Properties - The Company uses the successful efforts method
of accounting for its oil and gas operations. Under this method, the costs of
all development wells are capitalized. Capitalized costs are amortized on the
units-of-production method based on estimated total proved reserves. The
acquisition costs of proved oil and gas properties are capitalized and
periodically assessed for impairments.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standard ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which
requires certain assets to be reviewed for impairment whenever events or
circumstances indicate the carrying amount may not be recoverable. Prior to this
pronouncement, the Predecessor Partnerships assessed properties on an aggregate
basis. Upon adoption of SFAS 121, the Predecessor Partnerships began assessing
properties on an individual basis, wherein total capitalized costs may not
exceed the property's fair market value. The fair market value of each property
was determined by H. J. Gruy and Associates, ("Gruy"). To determine the fair
market value, Gruy estimated each property's oil and gas reserves, applied
certain assumptions regarding price and cost escalations, applied a 10% discount
factor for time and certain discount factors for risk, location, type of
ownership interest, category of reserves, operational characteristics, and other
factors. In the first quarter of 1996, the Company recognized a non-cash
impairment provision of $2,315,081 for certain oil and gas properties due to
changes in the overall market for the sale of oil and gas and significant
decreases in the projected production from certain of the Company's oil and gas
properties.
The Company's operating interests in oil and gas properties are
recorded using the pro rata consolidation method pursuant to Interpretation 2 of
Accounting Principles Board Opinion 18.
Cash Flows - The Company has presented its cash flows using the
indirect method and considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
General and Administrative Expenses - The Company reimburses the
General Partner for direct costs and administrative costs incurred on its
behalf. Administrative costs allocated to the Company are computed on a cost
basis in accordance with standard industry practices by allocating the time
spent by the General Partner's personnel among all projects and by allocating
rent and other overhead on the basis of the relative direct time charges.
Use of Estimates - The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from these estimates.
F-34
<PAGE> 202
3. FEDERAL INCOME TAXES
General - The Company is not a taxable entity for federal income tax
purposes. Such taxes are liabilities of the individual partners, and the amounts
thereof will vary depending on the individual situation of each partner.
Accordingly, there is no provision for income taxes in the accompanying
financial statements. Set forth below is a reconciliation of net income as
reflected in the accompanying financial statements and net income (loss) for
federal income tax purposes for the year ended December 31, 1997:
<TABLE>
<CAPTION>
Allocable to
--------------------- Per Limited
General Limited Partner Unit
TOTAL Partner Partners Outstanding
----------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Net income as reflected in the
accompanying financial statements $ 3,463,051 $ 273,866 $ 3,189,185 $ 3
Reconciling items:
Intangible drilling costs capitalized
for financial reporting purposes
which were charged-off for federal
income tax purposes (97,373) (3,998) (93,375) (0)
Difference in gain on property sales for
federal income tax purposes and
the amount computed for financial
reporting purposes (377,830) -- (377,830) (0)
Difference in depreciation and depletion
computed for federal income tax
purposes and the amount computed
for financial reporting purposes (11,269) (15,564) 4,295 0
Other timing differences (2,787,155) (195,830) (2,591,325) (3)
----------- --------- ----------- ------------
Net income (loss) for federal
income tax purposes $ 189,424 $ 58,474 $ 130,950 0
=========== ========= =========== ============
</TABLE>
Net income (loss) for federal income tax purposes is a summation of ordinary
income (loss), portfolio income (loss), cost depletion and intangible drilling
costs as presented in the Company's federal income tax return.
Set forth below is a reconciliation between partners' capital as reflected in
the accompanying financial statements and partners' capital for federal income
tax purposes as of December 31, 1997:
<TABLE>
<CAPTION>
Allocable to
------------------------- Per Limited
General Limited Partner Unit
TOTAL Partner Partners Outstanding
----------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Partners' capital as reflected in the
accompanying financial statements $12,871,381 $ 71,135 $12,800,246 $ 12
Reconciling items:
Intangible drilling costs capitalized
for financial reporting purposes
which were charged-off for federal
income tax purposes (5,733,247) (521,110) (5,212,137) (5)
Accumulated difference in property
sales for financial reporting purposes
</TABLE>
F-35
<PAGE> 203
<TABLE>
<S> <C> <C> <C> <C>
and for federal income tax purposes (705,279) (7,105) (698,174) 0
Difference in accumulated depreciation,
depletion and amortization for financial
reporting purposes and tax purposes 17,653,897 (15,327) 17,669,224 16
Commissions and syndication fees
capitalized for income tax purposes 15,889,041 - 15,889,041 14
Costs of consolidation 485,435 48,544 436,891 0
Consolidation of Partnerships 310,378 1,372,540 (1,062,162) (1)
Other timing differences (3,413,248) 78,140 (3,491,388) (3)
----------- ---------- ------------ ------------
Partners' capital for federal
income tax purposes $37,358,358 $1,026,817 $36,331,541 $ 33
=========== ========== ============ ============
</TABLE>
4. SIGNIFICANT PURCHASERS
Gulfmark Inc. accounted for 11% of the Company's total sales in 1997.
Dreyfus Energy, Inc., Exxon Company, USA and Koch Hydrocarbons, Inc. accounted
for 14%, 14% and 10%, respectively, of the Company's total sales in 1996. No
other purchaser individually accounted for more than 10% of such sales.
5. LITIGATION SETTLEMENTS
A Predecessor Partnership was named as a party to a suit filed by Texas
Crude, Inc. ("Texas Crude"). In the suit, Texas Crude sought to recover legal
and other fees totaling $600,000. In August 1993, a judgement was granted in
favor of Texas Crude for $414,203 plus interest by the 101st Judicial District
Court of Texas. The Partnership recognized a contingent liability at December
31, 1993 for $504,350.
The Partnership appealed the verdict and filed a counterclaim for funds
that were wrongfully withheld by Texas Crude. In December 1994, the Fifth
District Court of Appeals reversed the judgement of the trial court and rendered
judgement in favor of the Partnership, in which the Partnership will recover
$163,019 from Texas Crude plus interest. Accordingly, the contingent liability,
initially recognized in 1993, was reversed in December 1994 and a receivable for
$254,588 was established in 1994.
Both the Partnership and Texas Crude have filed Motions for Rehearing,
which have been pending for several years. Interest has accrued on the
receivable balance at a rate of ten percent (10%) per annum. The accrued
receivable balance at December 31, 1997 was $338,860.
6. PROPERTY TRANSACTIONS
In 1996, the Predecessor Partnerships sold their interests in the Grass
Island, Enexco and Comite acquisitions for $235,000, $64,000 and $55,000,
respectively. Gains of $69,731, $61,648 and $21,649, respectively were
recognized on these sales. The Predecessor Partnerships also sold their
interests in the E.M. Lane well and the Harper #1 wed for $57,970 and $55,000,
respectively. Gains of $31,310 and $44,642, respectively, were recognized on
these
F-36
<PAGE> 204
sales. The Predecessor Partnerships also sold their interests in three other
wells in 1996 for $59,630. These sales resulted in a net gain of $13,409 to the
Predecessor Partnerships. The impact of these sales on current and future
revenues is not expected to be material, as such interests represented less than
10% of historical and future net revenues.
In 1997, the Company sold its interest in the North Buck Draw Unit for
$857,120. A gain of $758,969 was recognized on the sale. The Company sold its
interest in the Mcbride acquisition for $56,306. A loss of $25,405 was
recognized on the sale. The Company also sold its interest in three other
acquisitions for $8,053. A net gain of $8,053 was recognized by the Company from
the sales. The impact of these sales on current and future revenues is not
expected to be material, as such interests represented less than 10% of
historical and future net revenues.
7. PAYABLE TO GENERAL PARTNER
The payable to general partner primarily consists of general and
administrative expenses allocated to the Company by Enex for its ongoing
operations. The Company plans to repay the amounts owed to the general partner
during 1998.
8. SUBSEQUENT EVENT
In February 1998, Middle Bay Oil Company, Inc. ("Middle Bay"), an
independent oil and gas producer, announced a tender offer for all of the
outstanding shares of Enex Resources Corporation, the Company General Partner.
The tender offer was accepted by a majority of Enex's shareholders.
F-37
<PAGE> 205
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 10-2A-2 1 of the Alabama Business Corporation Act provides as
follows:
(a) A corporation shall have power to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed claim, action, suit or proceeding, whether civil, criminal,
administrative or investigative, including appeals (other than an action by or
in the right of the corporation), by reason of the fact that he is or was a
director, officer, employee or agent of the corporation or is or was serving at
the request of the corporation as a director, officer, partner, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such claim, action, suit or proceeding if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
claim, action, suit or proceeding by judgment, order, settlement, conviction or
upon a plea of nolo contendere or its equivalent shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful..
(b) A corporation shall have power to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed claim, action or suit by or in the right of the corporation to procure
a judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, partner, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the corporation unless and only to
the extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which such court shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith, notwithstanding that he has not been
successful on any other claim, issue or matter in any such action, suit or
proceeding.
II-1
<PAGE> 206
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b) of this
section. Such determination shall be made (1) by the Board of Directors by a
majority vote of a quorum consisting of directors who were not parties to, or
who have been wholly successful on the merits or otherwise with respect to, such
claim, action, suit or proceeding, or (2) if such a quorum is not obtainable or,
even if obtainable, a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, or (3) by the shareholders.
(e) Expenses (including attorneys' fees) incurred in defending a civil
or criminal claim, action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such claim, action, suit or proceeding as
authorized in the manner provided in subsection (d) of this section upon receipt
of an undertaking by or on behalf of the director, officer, employee or agent to
repay such amount if and to the extent that it shall be ultimately determined
that he is not entitled to be indemnified by the corporation as authorized in
this section.
(f) The indemnification authorized by this section shall not be deemed
exclusive of and shall be in addition to any other right (whether created prior
or subsequent to the enactment of this section) to which those indemnified may
be entitled under any statute, rule of law, provisions of articles of
incorporation, bylaw, agreement, vote of shareholders or disinterested
directors, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office and shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such person.
(g) A corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, partner, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity or arising out of
his status as such, whether or not the corporation would have the power to
indemnify him against such liability under the provisions of this section.
Article IX of the Articles of Incorporation of registrant provides as
follows:
"(a) The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed claim, action, suit or proceeding, whether civil, criminal,
administrative or investigative, including appeals (other than an action by or
in the right of the Corporation) by reason of the fact that an individual is or
was a director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, partner,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such
individual in connection with such claim, action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any claim, action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo
II-2
<PAGE> 207
contendere or its equivalent shall not, of itself, create a presumption that the
person did not act in good faith and in a manner which he reasonably believed to
be in or not opposed to the best interests of the Corporation and, with respect
to any criminal action or proceeding, had reasonable cause to believe that his
conduct was lawful.
(b) The Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed claim,
action or suit by or in the right of the Corporation to procure a judgment in
its favor by reason of the fact that the person is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, partner, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the Corporation, unless and only to
the extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
Section IX or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith, notwithstanding that he has not been
successful on any other claim, issue or matter in any such action, suit or
proceeding.
(d) Any indemnification under subsections (a) and (b) of this Section
IX (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in subsections (a) and (b)
of this Section. Such determination shall be made (1) by the Board of Directors
by a majority vote of a quorum consisting of directors who were not parties to,
or who have been wholly successful on the merits or otherwise with respect to,
such claim, action, suit or proceeding, or (2) if such quorum is not obtainable
or, even if obtainable, a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, or (3) by the shareholders.
(e) Expenses (including attorneys' fees) incurred in defending a civil
or criminal claim, action, suit or proceeding may be paid by the Corporation in
advance of the final disposition of such claim, action, suit or proceeding as
authorized in the manner provided in subsection (d) of this Section upon receipt
of an undertaking by or on behalf of the director, officer, employee or agent to
repay such amount if and to the extent that it shall be ultimately determined
that he is not entitled to be indemnified by the Corporation as authorized in
this Section.
(f) The indemnification authorized by this Section shall not be deemed
exclusive of and shall be in addition to any other right (whether created prior
or subsequent to the adoption of this Section) to
II-3
<PAGE> 208
which those indemnified may be entitled under any statute, rule of law, bylaw,
agreement, vote of shareholders or disinterested directors, or otherwise, both
as to action in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
(g) The Corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, partner, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against any liability
asserted against him and incurred by him in any such capacity or arising out of
his status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of this Section."
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The Exhibits filed as part of this Registration Statement are as follows:
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<S> <C>
3.1 Articles of Incorporation(1)
3.2 Articles of Amendment to Articles of Incorporation reflecting
reverse splits(2)
3.3 Articles of Amendment to Articles of Incorporation designating
preferences and rights of Series A Preferred Stock(3)
3.4 Articles of Amendment to Articles of Incorporation designating
preferences and rights of Series B Preferred Stock(4)
3.5 Articles of Amendment to Articles of Incorporation increasing
authorized capital stock(5)
3.6 Articles of Amendment to Articles of Incorporation increasing
authorized capital stock(6)
3.7 Proposed Articles of Amendment to Articles of Incorporation
designating preferences and rights of Series C Preferred
Stock
3.8 Bylaws (1)
5.1 Opinion of Thrasher, Whitley, Hampton & Morgan as to legality
of the preferred and common stock registered hereunder (to be
filed by Amendment)
8.1 Opinion of Thrasher, Whitley, Hampton & Morgan as to federal
income tax consequences of the merger (to be filed by
amendment)
</TABLE>
II-4
<PAGE> 209
<TABLE>
<S> <C>
10.1 Executive Employment Agreement for John J. Bassett dated
January 30, 1997(11)
10.2 Executive Employment Agreement for Robert W. Hammons dated
January 30, 1997(11)
10.3 Executive Employment Agreement for Stephen W. Herod dated July
1, 1997(11)
10.4 1995 Stock Option and Stock Appreciation Rights Plant(7)
10.5 Amended and Restated 1995 Stock Option and Stock Appreciation
Rights Plans(5)
10.6 Amendment No. 1 to Amended and Restated 1995 Stock Option and
Stock Appreciation Rights Plans(6)
10.7 Credit Agreement between registrant and Enex Resources
Corporation, as borrower, and Compass Bank, as agent and a
lender, Bank of Oklahoma, N.A., as a lender, and the other
lenders signatory thereto, dated March 27, 1998(8)
10.8 Asset Purchase Agreement among registrant, Service Drilling
Co., L.L.C. and Diamond S Gas Systems, L.L.C. dated April 16,
1998(9)
10.9 Consulting Agreement between Gerald B. Eckley and registrant
dated April 15, 1998(13)
11.1 Statement regarding computation of per-share earnings(l0)
12.0 Middle Bay Oil Company ratio of earnings to fixed charges (to
be filed by amendment)
12.1 Enex Consolidated Partners ratio of earnings to fixed charges
(to be filed by amendment)
16.1 Letter from Schultz, Watkin & Company regarding change in
certifying public accountants dated October 9, 1998(12)
21.1 Subsidiaries of registrant
23.1 Consent of Thrasher, Whitley, Hampton & Morgan (to be included
in Exhibit 5. 1)
</TABLE>
II-5
<PAGE> 210
<TABLE>
<S> <C>
23.2 Consent of Schultz, Watkins & Company, independent accountants
23.3 Consent of Deloitte & Touche, LLP, independent
accountants
23.4 Consent of H.J. Gruy and Associates, Inc., independent
petroleum engineers
23.5 Consent of Harris Webb & Garrison, Inc., financial advisor
(included in the Fairness Opinion, Exhibit "D" to the
Prospectus)
23.6 Consent of Ryder Scott Company, independent petroleum
consulting firm
23.7 Consent of Lee Keeling and Associates, Inc., independent
petroleum consulting firm
23.8 Consent of Cawley, Gillespie & Associates, Inc., independent
petroleum consulting firm
23.9 Consent of Huddleston & Co., Inc., independent petroleum
consulting firm
23.10 Consent of DeGolyer and MacNaughton, independent petroleum
consulting firm
24.1 Power of Attorney (included on signature page)
(1) Incorporated by reference to exhibits to registrant's Registration
Statement on Form S-4 filed October 4, 1993.
(2) Incorporated by reference to exhibit A to registrant's definitive Proxy
Statement filed February 15, 1995.
(3) Incorporated by reference to exhibit 99.2 to registrant's Form 8-K
filed September 19, 1996.
(4) Incorporated by reference to exhibit C to the Agreement and Plan of
Merger among registrant, Shore Acquisition Company, Shore Oil Company
and its shareholders filed as exhibit 2.1 to registrant's Form 8-K
filed July 3, 1997.
(5) Incorporated by reference to exhibits to registrant's definitive Proxy
Statement filed May 5, 1997.
(6) Incorporated by reference to exhibits to registrant's definitive Proxy
Statement filed May 15, 1998.
(7) Incorporated by reference to exhibit A to registrant's definitive Proxy
Statement filed May 11, 1995.
(8) Incorporated by reference to exhibits to Amendment No. 3 and Final
Amendment to registrant's Schedule 14D-1 filed April 13, 1998.
(9) Incorporated by reference to exhibits to registrant's Form 8-K filed
May 6, 1998.
(10) Incorporated by reference to exhibits to registrant's Form 10-KSB/A
filed May 15, 1998.
(11) Incorporated by reference to exhibits to registrant's Form 10-KSB filed
March 31, 1998.
(12) Incorporated by reference to Form 8-K filed October 13, 1998.
(13) Incorporated by reference to exhibits to Registrant's Registration
Statement on Form S-4 filed July 31, 1998 of which this Amendment No. 1
amends.
</TABLE>
II-6
<PAGE> 211
The registrant to provide to the Commission, upon request, copies of
instruments defining the rights of holders of long-term debt of the registrant
and its consolidated subsidiaries and for any unconsolidated subsidiaries for
which financial statements are required to be filed with the Commission.
Item 22. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section l0(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of the registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
(5) That every prospectus (i) that is filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements of Section
l0(a)(3) of the Act and is used in connection with an offering of securities
subject to Rule 145, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-7
<PAGE> 212
(6) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registration has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(7) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, l0(b), 11 or 13 of this Form, within one business day of receipt of
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(8) The undersigned hereby undertakes to supply, by means of a
post-effective amendment, all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-8
<PAGE> 213
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Houston, State of Texas, on this 16th day of October, 1998.
MIDDLE BAY OIL COMPANY, INC.
By: /s/ John J. Bassett
------------------------------------------------
John J. Bassett
Chairman of the Board of Directors,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<S> <C>
*
- ----------------------------------------
John J. Bassett
Director, President, Chief Executive and
Operating Officer
*
- ----------------------------------------
C.J. Lett, III
Executive Vice President and Director
* *By: /s/ John J. Bassett
- ---------------------------------------- ----------------------------
Stephen W. Herod John J. Bassett
Vice President and Director Pursuant to a Power of Attorney
* Dated: October 16, 1998
- ----------------------------------------
Edward P. Turner, Jr.
Director
*
- ----------------------------------------
Frank E. Bolling, Jr.
Director
*
- ----------------------------------------
Gary R. Christopher
Director
*
- ----------------------------------------
Alvin V. Shoemaker
Director
</TABLE>
<PAGE> 1
CERTIFICATE OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION OF
MIDDLE BAY OIL COMPANY, INC.
I.
The name of the corporation is MIDDLE BAY OIL COMPANY, INC., a
corporation organized and existing under and by virtue of the Alabama Business
Corporation Act (the "Corporation").
II.
In accordance with the provisions of Article III of the Articles of
Incorporation of the Corporation, the Corporation has the authority to issue not
more than 5,000,000 shares of Preferred Stock of the Corporation with a $0.02
par value. The Corporation has previously designated up to 1,666,667 shares as
Series A Preferred Stock, all of which have been converted into shares of Common
Stock and all of which have been restored to the status of authorized but
unissued shares of preferred stock (without designation as to series), and up to
266,667 shares as Series B Preferred Stock, which have a stated value of $7.50
per share. The Corporation hereby designates a new series of preferred stock.
The distinctive designation of such series shall be "Series C Preferred Stock,"
and the number of shares constituting such series shall be 2,346,400 shares
having a stated value of $5.00 per share. The rights and preferences of the
holders of the Series C Preferred Stock shall be as set forth in the following
Sections A through I of Article III.
III.
A. Certain Definitions. For purposes of the Series C Preferred
Stock, the following terms shall have the meanings indicated:
"ABCA" means the Alabama Business Corporation Act, as
amended from time to time.
"Affiliate" of a person means a person that directly,
or indirectly through one or more intermediaries, controls or is
controlled by or is under common control with the person specified.
"Board of Directors" shall mean the Board of
Directors of the Corporation or any committee authorized by such Board
of Directors to perform any of its responsibilities with respect to the
Series C Preferred Stock.
- 1 -
<PAGE> 2
"Business Day" shall mean any day other than a
Saturday, Sunday or a day on which state or federally-chartered banking
institutions in Houston, Texas are not required to be open.
"Call Date" shall have the meaning set forth in
paragraph (2) of Section D hereof.
"Common Stock" means, collectively, the Corporation's
Common Stock, par value $.0.02 per share, and any capital stock of any
class of the Corporation hereafter authorized which is not limited to a
fixed sum or percentage of par or stated value in respect to the rights
of the holders thereof to participate in dividends or in the
dissolution of assets upon any liquidation, dissolution or winding up
of the Corporation.
"Conversion Rate" shall initially mean 1.0 to 1.0,
subject to adjustment pursuant to paragraph (4) of Section F hereof.
"Cumulative Dividends" shall mean all accumulated,
accrued and unpaid dividends.
"Current Market Price" of publicly traded shares of
Common Stock or any other class or series of stock or other security of
the Corporation or of any similar security of any other issuer for any
day shall mean the last reported sales price, regular way on such day,
or, if no sale takes place on such day, the average of the reported
closing, bid and asked prices regular way on such day, in either case
as reported on the Small Cap Market of the National Association of
Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or, if
such security is not quoted on such Small Cap Market, the average of
the closing bid and asked prices on such day in the over-the-counter
market as reported by NASDAQ or, if bid and asked prices for such
security on such day shall not have been reported through NASDAQ, the
average of the bid and asked prices on such day as furnished by any
NASDAQ member firm regularly making a market in such security selected
for such purpose by the Chief Executive Officer or the Board of
Directors or if any class or series of securities are not publicly
traded, the fair value of the shares of such class as determined
reasonably and in good faith by the Board of Directors of the
Corporation.
"Distribution" shall have the meaning set forth in
paragraph (4)(c) of Section F hereof.
"Dividend Payment Date" shall have the meaning set
forth in Section I hereof.
"Fair Market Value" shall mean the average of the
daily Current Market Prices of a share of Common Stock during five (5)
consecutive Trading Days selected by the Corporation commencing not
more than twenty (20) Trading Days before, and ending not later than,
the earlier of the day in question and the day before the "ex" date
with respect to the issuance or distribution requiring such
computation. The term "'ex' date", when used with respect to any
issuance or distribution, means the first day on which the share of
Common Stock trades regular way, without the
- 2 -
<PAGE> 3
right to receive such issuance or distribution, on the exchange or in
the market, as the case may be, used to determine that day's Current
Market Price.
"Issue Date" shall mean __________, 1998.
"Junior Securities" means any of the Corporation's
equity securities other than the Series B Preferred Stock or any other
series of preferred stock issued as a Parity Stock.
"Parity Stock" shall have the meaning set forth in
paragraph (1) of Section G hereof.
"Permitted Common Stock Cash Distributions" shall
mean cash dividends or cash distributions out of current or accumulated
funds from operations (as determined by the Board of Directors on a
basis consistent with the policies and practices adopted by the
Corporation for reporting publicly its results of operations and
financial condition), and cash dividends which result in a payment of
an equal cash dividend to holders of the Series C Preferred Stock and
Parity Stock pursuant to paragraph (1) of Section C hereof.
"Person" shall mean any individual, firm,
partnership, corporation or other entity and shall include any
successor (by merger or otherwise) of such entity.
"Series C Preferred Stock" shall have the meaning set
forth in Article II hereof.
"set apart for payment" shall be deemed to include,
without any action other than the following, the recording by the
Corporation in its accounting ledgers of any accounting or bookkeeping
entry which indicates, pursuant to an authorization of dividends or
other distribution by the Board of Directors, the allocation of funds
to be so paid on any series or class of stock of the Corporation.
"Trading Day,", as to any securities, shall mean any
day on which such securities are traded on the Small Cap Market of
NASDAQ or, if such securities are not quoted on such Small Cap Market,
in the securities market in which such securities are traded.
"Transfer Agent" means OTC Stock Transfer, Salt Lake
City, Utah, or such other entity as may be designated by the Board of
Directors or their designee as the transfer agent for the Series C
Preferred Stock.
B. Dividends.
(1) The holders of Series C Preferred Stock shall be entitled
to receive, when, as and if authorized and declared by the Board of
Directors out of assets legally available for that purpose, cumulative
dividends in cash in an amount per share of Series C Preferred Stock
equal to $.50 per
- 3 -
<PAGE> 4
annum, payable semi-annually on March 31st and September 30th (measured
by the fiscal year of the Corporation) or on such dates as may be set
by the Board of Directors (a "Dividend Payment Date") to holders of
record on such date, not more than sixty nor less than ten days
preceding such Dividend Payment Date, fixed for such purpose by the
Board of Directors (a "Dividend Record Date"). Such dividends shall be
cumulative from the Issue Date, whether or not such dividends shall be
authorized or there shall be assets of the Corporation legally
available for the payment of such dividends. Each such dividend shall
be payable to the holders of record of the Series C Preferred Stock, as
they appear on the stock records of the Corporation at the close of
business on the Dividend Record Date. The amount of Cumulative
Dividends on any share of Series C Preferred Stock, or fraction
thereof, at any date shall be the amount of any dividends thereon
calculated at the applicable rate to and including such date, whether
or not earned or authorized, which have not been paid in cash.
(2) If the Series C Preferred Stock is outstanding for less
than any full fiscal year of the Corporation, the holders shall be
entitled to receive the amount set forth in paragraph (1) of this
Section B multiplied by a fraction, the numerator of which equals the
number of days during such fiscal year that such shares of Series C
Preferred Stock were outstanding and the denominator of which is 360.
Holders of Series C Preferred Stock shall not be entitled to any
dividends, whether payable in cash, property or stock, in excess of
cumulative dividends, as herein provided, on the Series C Preferred
Stock. No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on the Series C
Preferred Stock that may be in arrears.
(3) So long as any of the shares of Series C Preferred Stock
are outstanding, no dividends (other than dividends or distributions
paid in shares of or options, warrants or rights to subscribe for or
purchase shares of Junior Stock) shall be authorized or paid or set
apart for payment by the Corporation or other distribution of cash or
other property authorized or made directly or indirectly by the
Corporation with respect to any shares of Junior Stock, nor shall any
shares of Junior Stock be redeemed, purchased or otherwise acquired
(other than a redemption, purchase or other acquisition of Common Stock
made for purposes of an employee incentive or benefit plan of the
Corporation or any subsidiary) for any consideration (or any moneys be
paid to or made available for a sinking fund for the redemption of any
shares of any such stock) directly or indirectly by the Corporation
(except by conversion into or exchange for Junior Stock), nor shall any
other cash or other property otherwise be paid or distributed to or for
the benefit of any holder of shares of Junior Stock in respect thereof,
directly or indirectly, by the Corporation unless in each case (a) the
full Cumulative Dividends on all outstanding shares of Series C
Preferred Stock and any other Parity Stock of the Corporation shall
have been paid or such dividends have been authorized and set apart for
payment with respect to the Series C Preferred Stock and all past
dividend periods with respect to such Parity Stock and (b) sufficient
funds shall have been paid or set apart for the payment of the full
dividend for the current fiscal year of the Corporation (including any
required pursuant to of paragraph (1) of this Section B) with respect
to the Series C Preferred Stock and the current dividend period with
respect to such Parity Stock.
- 4 -
<PAGE> 5
C. Liquidation Preference.
(1) In the event of any liquidation, dissolution or winding up
of the affairs of the Corporation, whether voluntary or involuntary,
before any assets of the Corporation shall be distributed, paid or set
aside for the holders of Junior Stock, the Corporation shall pay cash
to the holders of shares of Series C Preferred Stock $5.00 per share of
Series C Preferred Stock plus an amount equal to all Cumulative
Dividends (whether or not earned or authorized) to the date of final
distribution to such holders; but such holders shall not be entitled to
any further payment. Until the holders of the Series C Preferred Stock
and holders of Parity Stock have been paid this liquidation preference
in full, no payment will be made to any holder of Junior Stock upon the
liquidation, dissolution or winding up of the Corporation. If, upon any
liquidation, dissolution or winding up of the Corporation, the assets
of the Corporation, or proceeds thereof, distributable among the
holders of Series C Preferred Stock shall be insufficient to pay in
full the preferential amount aforesaid and liquidating payments on any
other shares of any class or series of Parity Stock, then such assets,
or the proceeds thereof, shall be distributed among the holders of
Series C Preferred Stock and any such other Parity Stock ratably in the
same proportion as the respective amounts that would be payable on such
Series C Preferred Stock and any such other Parity Stock if all amounts
payable thereon were paid in full. For the purposes of this Section C,
(a) a consolidation or merger of the Corporation with one or more
corporations, (b) a sale or transfer of all or substantially all of the
Corporation's assets, or (c) a statutory share exchange shall not be
deemed to be a liquidation, dissolution or winding up, voluntary or
involuntary, of the Corporation.
(2) Subject to the rights of the holders of any shares of
Parity Stock, upon any liquidation, dissolution or winding up of the
Corporation, after payment shall have been made in full to the holders
of Series C Preferred Stock and any Parity Stock, as provided in this
Section C, any other series or class or classes of Junior Stock shall,
subject to the respective terms thereof, be entitled to receive any and
all assets remaining to be paid or distributed, and the holders of the
Series C Preferred Stock and any Parity Stock shall not be entitled to
share therein.
(3) In determining whether a distribution (other than upon
voluntary or involuntary liquidation) by dividend, redemption or other
acquisition of shares of stock of the Corporation or otherwise is
permitted under the ABCA, no effect shall be given to amounts that
would be needed, if the Corporation were to be dissolved at the time of
the distribution, to satisfy the preferential rights upon dissolution
of holders of shares of stock of the Corporation whose preferential
rights upon dissolution are superior to those receiving the
distribution.
D. Redemption at the Option of the Corporation.
(1) Shares of Series C Preferred Stock shall not be redeemable
by the Corporation prior to January 1, 2000. On and after January 1,
2000, the Corporation, at its option, may redeem shares of Series C
Preferred Stock as set forth herein. Shares of Series C Preferred Stock
may be redeemed,
- 5 -
<PAGE> 6
in whole or in part, at the option of the Corporation at any time on or
after January 1, 2000 out of assets legally available therefor at a
redemption price payable in cash equal to $5.00 per share of Series C
Preferred Stock (plus an amount equal to all Cumulative Dividends, if
any, to the Call Date, whether or not earned or authorized, as provided
below).
(2) Shares of Series C Preferred Stock shall be redeemed by
the Corporation on the date specified in the notice to holders required
under paragraph (4) of this Section D (the "Call Date"). The Call Date
shall be selected by the Corporation, shall be specified in the notice
of redemption and shall be not less than 30 days nor more than 60 days
after the date notice of redemption is sent by the Corporation. Upon
any redemption of shares of Series C Preferred Stock pursuant to
paragraph (1) of this Section D, the Corporation shall pay in cash to
the holder of such shares an amount equal to all Cumulative Dividends,
if any, to the Call Date, whether or not earned or authorized.
Immediately prior to authorizing any redemption of the Series C
Preferred Stock, and as a condition precedent for such redemption, the
Company, by resolution of its Board of Directors, shall authorize a
mandatory dividend on the Series C Preferred Stock payable in cash on
the Call Date in an amount equal to all Cumulative Dividends as of the
Call Date on the Series C Preferred Stock to be redeemed, which amount
shall be added to the redemption price. If the Call Date falls after a
dividend payment record date and prior to the corresponding Dividend
Payment Date, then each holder of Series C Preferred Stock at the close
of business on such dividend payment record date shall be entitled to
the dividend payable on such shares on the corresponding Dividend
Payment Date notwithstanding the redemption of such shares prior to
such Dividend Payment Date. Except as provided above, the Corporation
shall make no payment or allowance for accumulated or accrued dividends
on shares of Series C Preferred Stock called for redemption or on the
shares of Common Stock issued upon such redemption.
(3) If full Cumulative Dividends on all outstanding shares of
Series C Preferred Stock and any other class or series of Parity Stock
of the Corporation have not been paid or authorized and set apart for
payment, no shares of Series C Preferred Stock may be redeemed unless
all outstanding shares of Series C Preferred Stock and Parity Stock are
simultaneously redeemed.
(4) If the Corporation shall redeem shares of Series C
Preferred Stock pursuant to paragraph (1) of this Section D, notice of
such redemption shall be given to each holder of record of the shares
to be redeemed. Such notice shall be provided by first class mail,
postage prepaid, at such holder's address as the same appears on the
stock records of the Corporation not less than 30 days nor more than 60
days prior to the Call Date. If the Corporation elects to provide such
notice by publication, it shall also promptly mail notice of such
redemption to the holders of the shares of Series C Preferred Stock to
be redeemed. Neither the failure to mail any notice required by this
paragraph (4), nor any defect therein or in the mailing thereof, to any
particular holder, shall affect the sufficiency of the notice or the
validity of the proceedings for redemption with respect to the other
holders. Any notice which was mailed in the manner herein provided
shall be conclusively presumed to have been duly given on the date
mailed whether or not the holder receives the notice. Each such mailed
or published notice shall state, as appropriate: (a) the Call Date; (b)
the number of shares of Series C
- 6 -
<PAGE> 7
Preferred Stock to be redeemed and, if fewer than all such shares held
by such holder are to be redeemed, the number of such shares to be
redeemed from such holder; (c) the place or places at which
certificates for such shares are to be surrendered for certificates
representing shares of Common Stock; (d) the then-current Conversion
Rate; and (e) that dividends on the shares of Series C Preferred Stock
to be redeemed shall cease to accrue on such Call Date except as
otherwise provided herein. Notice having been published or mailed as
aforesaid, from and after the Call Date (unless the Corporation shall
fail to issue and make available the amount of cash necessary to effect
such redemption, including all Cumulative Dividends to the Call Date,
whether or not earned or authorized), (i) except as otherwise provided
herein, dividends on the shares of Series C Preferred Stock so called
for redemption shall cease to accumulate or accrue on the shares of
Series C Preferred Stock called for redemption (except that, in the
case of a Call Date after a dividend record date and prior to the
related Dividend Payment Date, holders of Series C Preferred Stock on
the dividend record date will be entitled on such Dividend Payment Date
to receive the dividend payable on such shares), (ii) said shares shall
no longer be deemed to be outstanding, and (iii) all rights of the
holders thereof as holders of Series C Preferred Stock of the
Corporation shall cease (except the rights to receive the cash payable
upon such redemption, without interest thereon, upon surrender and
endorsement of their certificates if so required and to receive any
dividends payable thereon). The Corporation's obligation to provide
cash in accordance with the preceding sentence shall be deemed
fulfilled if, on or before the Call Date, the Corporation shall deposit
with a bank or trust company (which may be an affiliate of the
Corporation) that has, or is an affiliate of a bank or trust company
that has, a capital and surplus of at least $50,000,000, such amount of
cash as is necessary for such redemption, in trust, with irrevocable
instructions that such cash be applied to the redemption of the shares
of Series C Preferred Stock so called for redemption. No interest shall
accrue for the benefit of the holders of shares of Series C Preferred
Stock to be redeemed on any cash so set aside by the Corporation.
Subject to applicable escheat laws, any such cash unclaimed at the end
of two years from the Call Date shall revert to the general funds of
the Corporation, after which reversion the holders of shares of Series
C Preferred Stock so called for redemption shall look only to the
general funds of the Corporation for the payment of such cash.
As promptly as practicable after the surrender in
accordance with said notice of the certificates for any such shares so
redeemed (properly endorsed or assigned for transfer, if the
Corporation shall so require and if the notice shall so state), such
certificates shall be exchanged for cash (without interest thereon) for
which such shares have been redeemed in accordance with such notice. If
fewer than all the outstanding shares of Series C Preferred Stock are
to be redeemed, shares to be redeemed shall be selected by the
Corporation from outstanding shares of Series C Preferred Stock not
previously called for redemption by lot or by any other method as may
be determined by the Board of Directors in its discretion to be
equitable. If fewer than all the shares of Series C Preferred Stock
represented by any certificate are redeemed, then a new certificate
representing the unredeemed shares shall be issued without cost to the
holders thereof.
- 7 -
<PAGE> 8
E. Status of Shares. All shares of Series C Preferred Stock which shall
have been issued and redeemed, converted or reacquired in any manner by the
Corporation shall be restored to the status of authorized, but unissued shares
of Preferred Stock, without designation as to series.
F. Conversion. Holders of shares of Series C Preferred Stock shall have
the right to convert all or a portion of such shares into shares of Common
Stock, as follows:
(1) Subject to and upon compliance with the provisions of this
Section F, a holder of shares of Series C Preferred Stock shall have
the right, at such holder's option, at any time to convert such shares,
in whole or in part, into the number of fully paid and nonassessable
shares of authorized but previously unissued shares of Common Stock
obtained by multiplying the number of shares of Series C Preferred
Stock to be converted and the Conversion Rate (as in effect at the time
and on the date provided for in the last clause of paragraph (2) of
this Section F) by surrendering such shares to be converted, such
surrender to be made in the manner provided in paragraph (2) of this
Section F; provided, however, that the right to convert shares of
Series C Preferred Stock called for redemption pursuant to Section D
shall terminate at the close of business on the Call Date fixed for
such redemption, unless the Corporation shall default in making payment
upon such redemption under Section D hereof.
(2) In order to exercise the conversion right, the holder of
each share of Series C Preferred Stock to be converted shall surrender
the certificate representing such share, duly endorsed or assigned to
the Corporation or in blank, at the office of the Transfer Agent,
accompanied by written notice to the Corporation that the holder
thereof elects to convert such share of Series C Preferred Stock.
Unless the shares issuable on conversion are to be issued in the same
name as the name in which such share of Series C Preferred Stock is
registered, each share surrendered for conversion shall be accompanied
by instruments of transfer, in form satisfactory to the Corporation and
the Transfer Agent, duly executed by the holder or such holder's duly
authorized attorney and an amount sufficient to pay any transfer or
similar tax (or evidence reasonably satisfactory to the Corporation and
the Transfer Agent demonstrating that such taxes have been paid).
Holders of shares of Series C Preferred Stock at the
close of business on a dividend payment record date shall be entitled
to receive the dividend payable on such shares on the corresponding
Dividend Payment Date notwithstanding the conversion thereof following
such dividend payment record date and prior to such Dividend Payment
Date. However, shares of Series C Preferred Stock surrendered for
conversion during the period between the close of business on any
dividend payment record date and the opening of business on the
corresponding Dividend Payment Date (except shares converted after the
issuance of notice of redemption with respect to a Call Date during
such period, such shares of Series C Preferred Stock being entitled to
such dividend on the Dividend Payment Date) must be accompanied by
payment of an amount equal to the dividend payable on such shares on
such Dividend Payment Date. A holder of shares of Series C Preferred
Stock on a dividend payment record date who (or whose transferee)
tenders any such shares for conversion into shares of
- 8 -
<PAGE> 9
Common Stock on such Dividend Payment Date will receive the dividend
payable by the Corporation on such shares of Series C Preferred Stock
on such date, and the converting holder need not include payment of the
amount of such dividend upon surrender of shares of Series C Preferred
Stock for conversion. Except as provided above, the Corporation shall
make no payment or allowance for unpaid dividends, whether or not in
arrears, on converted shares or for dividends on the shares of Common
Stock issued upon such conversion.
As promptly as practicable after the surrender of
certificates for shares of Series C Preferred Stock as aforesaid, the
Corporation shall issue and shall deliver at such office to such
holder, or send on such holder's written order, a certificate or
certificates for the number of full shares of Common Stock issuable
upon the conversion of such shares of Series C Preferred Stock in
accordance with provisions of this Section F, and any fractional share
of Common Stock arising upon such conversion shall be settled as
provided in paragraph (3) of this Section F.
Each conversion shall be deemed to have been effected
immediately prior to the close of business on the date on which the
certificates for shares of Series C Preferred Stock shall have been
surrendered and such notice received by the Corporation as aforesaid,
and the person or persons in whose name or names any certificate or
certificates for shares of Common Stock shall be issuable upon such
conversion shall be deemed to have become the holder or holders of
record of the shares represented thereby at such time on such date and
such conversion shall be at the Conversion Rate in effect at such time
on such date unless the stock transfer books of the Corporation shall
be closed on that date, in which event such person or persons shall be
deemed to have become such holder or holders of record at the close of
business on the next succeeding day on which such stock transfer books
are open, but such conversion shall be at the Conversion Rate in effect
on the date on which such shares shall have been surrendered and such
notice received by the Corporation.
(3) No fractional share of Common Stock or scrip representing
fractions of a share of Common Stock shall be issued upon conversion of
the shares of Series C Preferred Stock. Instead of any fractional
interest in a share of Common Stock that would otherwise be deliverable
upon the conversion of shares of Series C Preferred Stock, the
Corporation shall pay to the holder of such share an amount in cash
based upon the Current Market Price of the Common Stock on the Trading
Day immediately preceding the date of conversion. If more than one
share shall be surrendered for conversion at one time by the same
holder, the number of full shares of Common Stock issuable upon
conversion thereof shall be computed on the basis of the aggregate
number of shares of Series C Preferred Stock so surrendered.
(4) The Conversion Rate shall be adjusted from time to time as
follows:
(a) If the Corporation shall after the Issue Date (i)
pay a dividend or make a distribution on its shares of Common
Stock in shares of Common Stock, (ii) subdivide its
outstanding Common Stock into a greater number of shares,
(iii) combine its outstanding
- 9 -
<PAGE> 10
Common Stock into a smaller number of shares or (iv) issue any
shares of stock by reclassification of its Common Stock, the
Conversion Rate in effect at the opening of business on the
day following the date fixed for the determination of
stockholders entitled to receive such dividend or distribution
or at the opening of business on the day following the day on
which such subdivision, combination or reclassification
becomes effective, as the case may be, shall be adjusted so
that the holder of any share of Series C Preferred Stock
thereafter surrendered for conversion shall be entitled to
receive the number of shares of Common Stock (or fraction of a
share of Common Stock) that such holder would have owned or
have been entitled to receive after the happening of any of
the events described above had such share of Series C
Preferred Stock been converted immediately prior to the record
date in the case of a dividend or distribution or the
effective date in the case of a subdivision, combination or
reclassification. An adjustment made pursuant to this
paragraph (4)(a) of this Section F shall become effective
immediately after the opening of business on the day next
following the record date (except as provided in paragraph (8)
below) in the case of a dividend or distribution and shall
become effective immediately after the opening of business on
the day next following the effective date in the case of a
subdivision, combination or reclassification.
(b) If the Corporation shall issue after the Issue
Date rights, options or warrants to all holders of Common
Stock entitling them (for a period expiring within 45 days
after the record date described below in this paragraph (4)(b)
of this Section F) to subscribe for or purchase Common Stock
at a price per share less than the Fair Market Value per share
of the Common Stock on the record date for the determination
of stockholders entitled to receive such rights or warrants,
then the Conversion Rate in effect at the opening of business
on the day next following such record date shall be adjusted
to equal the rate determined by multiplying (i) the Conversion
Rate in effect immediately prior to the opening of business on
the day following the date fixed for such determination by
(ii) a fraction, the numerator of which shall be the sum of
(X) the number of shares of Common Stock outstanding on the
close of business on the date fixed for such determination and
(Y) the number of additional shares of Common Stock offered
for subscription or purchase pursuant to such rights or
warrants, and the denominator of which shall be the sum of
(XX) the number of shares of Common Stock outstanding on the
close of business on the date fixed for such determination and
(YY) the number of shares that the aggregate proceeds to the
Corporation from the exercise of such rights or warrants for
Common Stock would purchase at such Fair Market Value. Such
adjustment shall become effective immediately after the
opening of business on the day next following such record date
(except as provided in paragraph (8) below). In determining
whether any rights or warrants entitle the holders of Common
Stock to subscribe for or purchase Common Stock at less than
such Fair Market Value, there shall be taken into account any
consideration received by the Corporation upon issuance and
upon exercise of such rights or warrants, the value of such
consideration, if other than cash, to be determined in good
faith by the Board of Directors.
- 10 -
<PAGE> 11
(c) If the Corporation shall distribute to all
holders of its Common Stock any shares of stock of the
Corporation (other than Common Stock) or evidence of its
indebtedness or assets (including cash, but excluding
Permitted Common Stock Cash Distributions) or rights or
warrants to subscribe for or purchase any of its securities
(excluding those rights and warrants issued to all holders of
Common Stock entitling them for a period expiring within 45
days after the record date referred to in paragraph (4)(b) of
this Section F above to subscribe for or purchase Common
Stock, which rights and warrants are referred to in and
treated under such paragraph (4)(b) above) (any of the
foregoing being hereinafter in this paragraph (4)(c) called
the "Distribution"), then in each such case the Conversion
Rate shall be adjusted so that it shall equal the rate
determined by multiplying (i) the Conversion Rate in effect
immediately prior to the close of business on the date fixed
for the determination of stockholders entitled to receive such
Distribution by (ii) a fraction, the numerator of which shall
be the Fair Market Value per share of Common Stock on the
record date mentioned below, and the denominator of which
shall be the Fair Market Value per share of Common Stock on
the record date mentioned below less the then fair market
value (as determined by the Board of Directors, whose
determination shall be conclusive and described in a Board
resolution), of the portion of the stock or assets or
evidences of indebtedness so distributed or of such rights or
warrants applicable to one share of Common Stock. Such
adjustment shall become effective immediately at the opening
of business on the Business Day next following (except as
provided in paragraph (8) below) the record date for the
determination of stockholders entitled to receive such
Distribution. For the purposes of this paragraph (4)(c), the
distribution of a right or warrant to subscribe or purchase
any of the Corporation's securities, which is distributed not
only to the holders of the Common Stock on the date fixed for
the determination of stockholders entitled to such
Distribution of such right or warrant, but also is distributed
with shares of Common Stock delivered to a Person converting
shares of Series C Preferred Stock after such determination
date, shall not require an adjustment of the Conversion Rate
pursuant to this paragraph (4)(c); provided that if on the
date, if any, on which a person converting shares of Series C
Preferred Stock such person would no longer be entitled to
receive such right or warrant with shares of Common Stock
(other than as a result of the termination of all such right
or warrant), a distribution of such rights or warrants shall
be deemed to have occurred and the Conversion Rate shall be
adjusted as provided in this paragraph (4)(c) and such day
shall be deemed to be "the date fixed for the determination of
the stockholders entitled to receive such distribution" and
"the record date" within the meaning of the two preceding
sentences.
(d) No adjustment in the Conversion Rate shall be
required unless such adjustment would require a cumulative
increase or decrease of at least 1% in such rate; provided,
however, that any adjustments that by reason of this paragraph
(4)(d) are not required to be made shall be carried forward
and taken into account in any subsequent adjustment until
made; and provided, further, that any adjustment shall be
required and made in accordance with the provisions of this
Section F (other than this paragraph (4)(d)) not later
- 11 -
<PAGE> 12
than such time as may be required in order to preserve the
tax-free nature of a distribution to the holders of shares of
Common Stock. Notwithstanding any other provisions of this
Section F, the Corporation shall not be required to make any
adjustment of the Conversion Rate for the issuance of any
shares of Common Stock pursuant to any plan providing for the
reinvestment of dividends or interest payable on securities of
the Corporation and the investment of additional optional
amounts in shares of Common Stock under such plan. All
calculations under this Section F shall be made to the nearest
cent (with $.005 being rounded upward) or to the nearest
one-tenth of a share (with .05 of a share being rounded
upward), as the case may be. Anything in this paragraph (4) of
this Section F to the contrary notwith standing, the
Corporation shall be entitled, to the extent permitted by law,
to make such reductions in the Conversion Rate, in addition to
those required by this paragraph (4), as it in its discretion
shall determine to be advisable in order that any stock
dividends, subdivision of shares, reclassification or
combination of shares, distribution of rights or warrants to
purchase stock or securities, or a distribution of other
assets (other than cash dividends) hereafter made by the
Corporation to its stockholders shall not be taxable, or if
that is not possible, to diminish any taxes that are otherwise
payable because of such event.
(5) If:
(a) the Corporation shall authorize a dividend (or
any other distribution) on the Common Stock (other than cash
dividends and cash distributions to the extent the same
constitute Permitted Common Stock Cash Distributions); or
(b) the Corporation shall authorize the granting to
the holders of the Common Stock of rights or warrants to
subscribe for or purchase any shares of any class or series of
stock or any other rights or warrants; or
(c) there shall be any reclassification of the Common
Stock or any consolidation or merger to which the Corporation
is a party and for which approval of any stockholders of the
Corporation is required, or a statutory share exchange, or an
issuer or self tender offer by the Corporation for all or a
substantial portion of its outstanding shares of Common Stock
(or an amendment thereto changing the maximum number of shares
sought or the amount or type of consideration being offered
therefor) or the sale or transfer of all or substantially all
of the assets of the Corporation as an entirety; or
(d) there shall occur the voluntary or involuntary
liquidation, dissolution or winding up of the Corporation,
then the Corporation shall cause to be filed with the Transfer Agent
and shall cause to be mailed to each holder of shares of Series C
Preferred Stock at such holder's address as shown on the stock records
of the Corporation, as promptly as possible, but at least 15 days prior
to the applicable date
- 12 -
<PAGE> 13
hereinafter specified, a notice stating (i) the record date for the
payment of such dividend, distribution or rights or warrants, or, if a
record date is not established, the date as of which the holders of
Common Stock of record to be entitled to such dividend, distribution or
rights or warrants are to be determined or (ii) the date on which such
reclassification, consolidation, merger, statutory share exchange,
sale, transfer, liquidation, dissolution or winding up is expected to
become effective, and the date as of which it is expected that holders
of Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities or other property, if any, deliverable upon
such reclassification, consolidation, merger, statutory share exchange,
sale, transfer, liquidation, dissolution or winding up or (iii) the
date on which such tender offer commenced, the date on which such
tender offer is scheduled to expire unless extended, the consideration
offered and the other material terms thereof (or the material terms of
any amendment thereto). Failure to give or receive such notice or any
defect therein shall not affect the legality or validity of the
proceedings described in this Section F.
(6) Whenever the Conversion Rate is adjusted as herein
provided, the Corporation shall promptly file with the Transfer Agent
an officer's certificate setting forth the Conversion Rate after such
adjustment and setting forth a brief statement of the facts requiring
such adjustment which certificate shall be conclusive evidence of the
correctness of such adjustment absent manifest error. Promptly after
delivery of such certificate, the Corporation shall prepare a notice of
such adjustment of the Conversion Rate setting forth the adjusted
Conversion Rate and the date such adjustment becomes effective and
shall mail such notice of such adjustment of the Conversion Rate to
each holder of shares of Series C Preferred Stock at such holder's last
address as shown on the stock records of the Corporation.
(7) In any case in which paragraph (4) of this Section F
provides that an adjustment shall become effective on the day next
following the record date for an event, the Corporation may defer until
the occurrence of such event (i) issuing to the holder of any share of
Series C Preferred Stock converted after such record date and before
the occurrence of such event the additional Common Stock issuable upon
such conversion by reason of the adjustment required by such event over
and above the Common Stock issuable upon such conversion before giving
effect to such adjustment and (ii) paying to such holder any amount of
cash in lieu of any fraction pursuant to paragraph (3) of this Section
F.
(8) There shall be no adjustment of the Conversion Rate in
case of the issuance of any stock of the Corporation in a
reorganization, acquisition or other similar transaction except as
specifically set forth in this Section F. If any action or transaction
would require adjustment of the Conversion Rate pursuant to more than
one paragraph of this Section F, only one adjustment shall be made and
such adjustment shall be the amount of adjustment that has the highest
absolute value.
(9) If the Corporation shall take any action affecting the
Common Stock, other than action described in this Section F, that in
the opinion of the Board of Directors would materially adversely affect
the conversion rights of the holders of Series C Preferred Stock, the
Conversion Rate for the Series C Preferred Stock may be adjusted, to
the extent permitted by law, in such manner, if any, and
- 13 -
<PAGE> 14
at such time as the Board of Directors, in its sole discretion, may
determine to be equitable under the circumstances.
(10) The Corporation will pay any and all documentary stamp or
similar issue or transfer taxes payable in respect of the issue or
delivery of shares of Common Stock or other securities or property on
conversion or redemption of shares of Series C Preferred Stock pursuant
hereto; provided, however, that the Corporation shall not be required
to pay any tax that may be payable in respect of any transfer involved
in the issue or delivery of shares of Common Stock or other securities
or property in a name other than that of the holder of the shares of
Series C Preferred Stock to be converted or redeemed, and no such issue
or delivery shall be made unless and until the person requesting such
issue or delivery has paid to the Corporation the amount of any such
tax or established, to the reasonable satisfaction of the Corporation,
that such tax has been paid.
G. Ranking. So long as any shares of Series C Preferred Stock are
outstanding, the Corporation shall not issue any class or series of stock which
would entitle the holders thereof to the receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up, as the case may be,
in preference or priority to the holders of Series C Preferred Stock. Any class
or series of stock of the Corporation shall be deemed to rank:
(1) on a parity with the Series C Preferred Stock, as to the
payment of dividends and as to distribution of assets upon liquidation,
dissolution or winding up, whether or not the dividend rates, dividend
payment dates or redemption or liquidation prices per share thereof be
different from those of the Series C Preferred Stock, if the holders of
such class of stock or series and the Series C Preferred Stock shall be
entitled to the receipt of dividends and of amounts distributable upon
liquidation, dissolution or winding up in proportion to their
respective amounts of accrued and unpaid dividends per share or
liquidation preferences, without preference or priority one over the
other ("Parity Stock"); and
(2) junior to the Series C Preferred Stock, as to the payment
of dividends or as to the distribution of assets upon liquidation,
dissolution or winding up, if such stock or series shall be Common
Stock or if the holders of Series C Preferred Stock shall be entitled
to receipt of dividends or of amounts distributable upon liquidation,
dissolution or winding up, as the case may be, in preference or
priority to the holders of shares of such class or series ("Junior
Stock").
Series B Preferred Stock shall be considered Parity Stock.
H. Voting Rights. Holders of Series C Preferred Stock are entitled to
vote solely upon those amendments, alterations or repeals of any provision of
the Corporation's Articles of Incorporation adversely affecting their rights and
preferences as preferred stockholders; provided, however, that the issuance by
the Corporation of additional series of preferred stock will not be deemed to
adversely affect the rights and preferences of holders of Series C Preferred
Stock, so long as any such series of preferred stock ranks junior
- 14 -
<PAGE> 15
to or on a parity with the Series C Preferred Stock. The holders of Series C
Preferred Stock shall have no other voting rights, except as prescribed by law.
For purposes of the foregoing provisions of this Section H, each share
of Series C Preferred Stock shall have one vote per share.
Nothing contained in this Section H shall require a vote of the holders
of Series C Preferred Stock (i) in connection with any merger or consolidation
in which the Corporation is the surviving entity if, immediately after the
merger or consolidation, there are outstanding no shares and no securities
convertible into shares of any class ranking as to distribution rights or
liquidation preference senior to the Series C Preferred Stock or (ii) in
connection with any merger or consolidation in which the Corporation is not the
surviving entity if, as result of the merger or consolidation, the holders of
Series C Preferred Stock receive shares of stock or beneficial interest or other
equity securities with preferences, rights and privileges not materially
inferior to the preferences, rights and privileges of the Series C Preferred
Stock.
I. Severability of Provisions. If any preference, conversion or other
right, voting power, restriction, limitation as to dividends or other
distributions, qualification or term or condition of redemption of the Series C
Preferred Stock set forth herein is invalid, unlawful or incapable of being
enforced by reason of any rule of law or public policy, all other preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications or terms or conditions of
redemption of the Series C Preferred Stock set forth herein which can be given
effect without the invalid, unlawful or unenforceable provision thereof shall,
nevertheless, remain in full force and effect, and no preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications or terms or conditions of redemption of the Series
C Preferred Stock herein set forth shall be deemed dependent upon any other
provision thereof unless so expressed therein.
IN WITNESS WHEREOF, Middle Bay Oil Company, Inc. has caused this
Certificate of Amendment to be signed by its President and attested by its
Secretary this _________ day of October, 1998.
MIDDLE BAY OIL COMPANY, INC.
ATTEST:
By:
---------------------------
President
- -------------------------
Secretary
- 15 -
<PAGE> 16
STATE OF ALABAMA
MOBILE COUNTY
I, _________________________________________, the undersigned authority
in and for said County and State, do hereby certify that JOHN J. BASSETT and
LYNN M. DAVIS, whose names as President and Secretary, respectively, of Middle
Bay Oil Company, Inc., an Alabama corporation, are signed to the foregoing
instrument and who are known to me, acknowledged before me on this day that,
being informed of the contents of this instrument, they, as such officers and
with full authority, executed the same voluntarily for and as an act of the
corporation.
Given under my hand and official seal on this the ________ day of
October, 1998.
--------------------------
Notary Public
My Commission
Expires:
--------------------
- 16 -
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
Middle Bay Production Company, Inc., a Kansas corporation (100% owned)
Enex Resources Corporation, a Delaware corporation (79.2% owned)
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the use in this Amendment No. 1 to the Registration
Statement of Middle Bay Oil Company on Form S-4 of our report relating to the
financial statements of Middle Bay Oil Company, Inc. and subsidiaries appearing
in the Prospectus, which is a part of this Registration Statement, and to the
reference to us under the heading "Experts" in such Prospectus.
/s/ Schultz, Watkins, & Company
---------------------------------------------
SCHULTZ, WATKINS & COMPANY
Jackson, Mississippi
October 9, 1998
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Middle Bay Oil Company,
Inc. on Form S-4 of our report dated March 25, 1998 related to the financial
statements of Enex Consolidated Partners, L.P., appearing in the Prospectus,
which is a part of this Registration Statement, and to the reference to us under
the heading "Experts" in the Prospectus.
/s/ Deloitte & Touche, LLP
- --------------------------
DELOITTE & TOUCHE, LLP
Houston, Texas
October 16, 1998
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
As independent petroleum engineers, we hereby consent to the inclusion by
reference of our report in this Amendment No. 1 to the Registration Statement
dated September 23, 1998 (the "Report") and to all references to said Report and
to our firm included herein.
H.J. GRUY AND ASSOCIATES, INC.
/s/ James H. Hartsock
--------------------------------
James H. Hartsock, PhD, PE
Executive Vice President
Houston, Texas
October 9, 1998
<PAGE> 1
EXHIBIT 23.6
CONSENT OF INDEPENDENT PETROLEUM
CONSULTANTS
We consent to the reference to our firm under the caption "Experts" in
the Prospectus that is a part of Amendment No. 1 to the Registration Statement
on Form S-4 of Middle Bay Oil Company, Inc.
/s/ Ryder Scott Company
/s/ Petroleum Engineers
--------------------------
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
October 15, 1998
<PAGE> 1
EXHIBIT 23.7
LEE KEELING AND ASSOCIATES, INC.
PETROLEUM CONSULTANTS
FIRST PLACE TOWER
15 EAST 5TH STREET, SUITE 3500
TULSA, OKLAHOMA 74103-4350 USA
(918) 587-5521
FACSIMILE (918) 587-2881
Exhibit_______
CONSENT OF INDEPENDENT PETROLEUM
CONSULTANTS
We consent to the reference to our firm under the caption "Experts" in the
Prospectus that is a part of Amendment No. 1 to the Registration Statement on
Form S-4 of Middle Bay Oil Company, Inc.
LEE KEELING AND ASSOCIATES, INC.
By: /s/ Kenneth Renberg
--------------------------------------
Kenneth Renberg, Vice President
Tulsa, Oklahoma
October 12, 1998
<PAGE> 1
EXHIBIT 23.8
CONSENT OF INDEPENDENT PETROLEUM CONSULTANTS
We consent to the reference to our firm under the caption "Experts" in
the Prospectus that is a part of Amendment No. 1 to the Registration Statement
on Form S-4 of Middle Bay Oil Company, Inc.
/s/ Cawley, Gillespie & Associates, Inc.
----------------------------------------
Cawley, Gillespie & Associates, Inc.
Houston, Texas
October 15, 1998
<PAGE> 1
EXHIBIT 23.9
EXHIBIT ___
CONSENT OF INDEPENDENT PETROLEUM
CONSULTANTS
We consent to the reference to our firm under the caption "Experts" in
the Prospectus that is a part of Amendment No. 1 to the Registration Statement
on Form S-4 of Middle Bay Oil Company, Inc.
/s/ B.P. Huddleston
-----------------------------------
Huddleston & Co., Inc.
Chairman
Houston, Texas
October 12, 1998
<PAGE> 1
EXHIBIT 23.10
DEGOLYER AND MACNAUGHTON
ON ENERGY SQUARE
DALLAS, TEXAS 75206
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the reference to our firm and to our reserves
estimates in Amendment No. 1 to the Registration Statement of Middle Bay Oil
Company, Inc. (the Company) on Form S-4 (the Registration Statement); provided,
however, that in the Registration Statement estimates of reserves, revenue, and
discounted present worth set forth in our report mentioned below have been
combined with estimates of reserves, revenue, and discounted present worth
prepared by other petroleum consultants. We are necessarily unable to verify the
accuracy of the reserves, revenue, and present worth values contained in the
Registration Statement when our estimates have been combined with those of
another firm. Our estimates of the oil, natural gas liquids, and natural gas
reserves owned by Middle Bay Oil Company in the Wellman Unit in Terry County,
Texas, are contained in our report entitled "Appraisal Report as of December 31,
1997, on an interest in the Wellman Unit owned by Middle Bay Oil Company -- SEC
Case."
De GOLYER and MacNAUGHTON
/s/ DeGolyer and MacNaughton
------------------------------------------
Dallas, Texas
October 13, 1998
